Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 1 of 62 PAGEID #: 231
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
INTERNATIONAL BROTHERHOOD OF ) No. 2:09-cv-01008-EAS-MRA ELECTRICAL WORKERS LOCAL 697 ) PENSION FUND, Individually and on Behalf ) Judge Sargus of All Others Similarly Situated, ) Magistrate Judge Abel ) Plaintiff, ) ) vs. ) ) LIMITED BRANDS, INC., et al., ) Defendants. ) ) )
AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
MURRAY MURPHY MOUL + BASIL LLP ROBBINS GELLER RUDMAN JOSEPH F. MURRAY (0063373) & DOWD LLP GEOFFREY J. MOUL (0070663) HENRY ROSEN BRIAN K. MURPHY (0070654) 655 West Broadway, Suite 1900 326 S. High Street, Suite 400 San Diego, CA 92101 Columbus, OH 43215 – and – SARAH R. HOLLOWAY Liaison Counsel 100 Pine Street, Suite 2600 San Francisco, CA 94111
Lead Counsel for Plaintiff
530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 2 of 62 PAGEID #: 232
INTRODUCTION
1. This is a securities class action on behalf of all persons who purchased or otherwise
acquired the publicly traded securities of Limited Brands, Inc. (“Limited Brands” or the “Company”) between August 22, 2007 and February 28, 2008, inclusive (the “Class Period”), against Limited
Brands, its Chief Executive Officer (“CEO”) Leslie H. Wexner (“Wexner”), its Chief Financial
Officer (“CFO”) Stuart B. Burgdoerfer (“Burgdoerfer”), its Executive Vice President and Chief
Administration Officer (“CAO”) Martyn R. Redgrave (“Redgrave”), and CEO and President of
Victoria’s Secret Megabrand and Intimate Apparel, a Limited Brands subsidiary, Sharen J. Turney
(“Turney”), for violations of the Securities Exchange Act of 1934 (the “Exchange Act”).
2. Limited Brands is a specialty retailer of women’s intimate and other apparel, beauty
and personal care products and accessories under various trade names, including Victoria’s Secret
and Bath & Body Works. The Company sells its merchandise through retail stores, websites and
catalogues.
3. Prior to the Class Period, Limited Brands was involved in an ongoing project to
upgrade and modernize its various information technology (“IT”) systems. As part of this initiative,
Limited Brands was planning to develop new “front-end” technology for its subsidiary Victoria’s
Secret Direct, LLC (“VSD”) to replace VSD’s outdated mainframe operating system. VSD handles
the online and catalogue orders for Victoria’s Secret Megabrand. Rather than develop the new
technology in-house, Limited Brands, along with private equity firm General Catalyst Partners
(“General Catalyst”), funded a new venture, n2N Commerce, Inc. (“n2N”), in 2006 to develop the
new system for VSD. According to a July 23, 2007 n2N press release, VSD planned to “operate its
$1.4 billion direct-to-consumer business on n2N’s on-demand platform in the second half of 2007.”
4. At the same time, Limited Brands was also building a new distribution center (“DC”)
for VSD. The DC project involved a new, large distribution warehouse, new conveyor system and
- 1 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 3 of 62 PAGEID #: 233
new Enterprise Resource Planning (“ERP”) system to interact with the new n2N software and fulfill
and ship VSD orders on the “back-end.” Limited Brands and VSD planned to implement the new
DC in August 2007.
5. Throughout 2007, defendants touted the new DC and n2N projects as “key strategic
imperatives” that would drive the Company’s and VSD’s growth. For example, prior to the Class
Period, defendants told investors that “[o]nly n2N [could] address [VSD’s] requirements” and that
n2N’s software would “drive down operating costs” and “reshape the retail industry.” In addition,
defendants told investors that Limited Brands’ investments in the n2N technology and new DC
would “support the growth” of VSD and “deliver future positive returns.”
6. By August 22, 2007, the start of the Class Period, defendants knew that neither the
n2N project nor the new DC would support VSD’s growth as they had led investors to believe.
Nonetheless, on August 23, 2007, defendants continued to tout the new DC as an investment that
would “support the future growth of [VSD’s] business.” Defendants also told investors that “[t]he
new D.C. ha[d] capacity to handle over 40% more volume than [the] old D.C.” and was
experiencing only “normal implementation issues.”
7. Defendants’ statements regarding the new DC were false or misleading, as they failed
to disclose significant problems known to defendants that were affecting the DC. By its
implementation in August 2007, defendants knew, through various daily internal reports, that the DC
was experiencing significant operational problems, resulting in numerous shipping and capacity
issues. According to percipient witnesses, the DC’s systems were significantly more complex than
the old systems and required substantial training to operate properly. Limited Brands, however,
failed to adequately train the DC staff prior to its August 2007 implementation. As a result, DC
floor workers had difficulty operating the new systems, resulting in numerous problems with its
operations, conveyor systems, order fulfillment and shipping. In addition, the new DC software was
- 2 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 4 of 62 PAGEID #: 234
plagued with “bugs” and required ongoing customizations to improve its functionality, further
hindering its operations. These problems were so substantial that from August 2007 to February
2008, Limited Brands employed a special team tasked specifically with fixing the DC’s pervasive problems.
8. Despite these problems, defendants continued to make false or misleading statements
and material omissions about the DC. On September 6, 2007, defendants told investors that while
the DC had experienced some “delays” in shipment times, resulting in decreased VSD sales, the DC
would “be operating under normal ship times by the end of September [2007].” Defendants
reaffirmed this statement on October 11, 2007, stating that the DC was “now operating under normal
ship times.” The DC, however, was not “operating under normal ship times.” According to percipient witnesses, the DC continued to experience significant software glitches and functional problems throughout 2007 and into 2008. Moreover, Limited Brands still had not properly trained
its DC workers prior to the 2007 holiday season – the Company’s busiest season. As a result, the
DC continued to experience operational problems resulting in shipments to many customers of the
wrong products, the wrong quantities or no items at all. These problems significantly inhibited the
shipment and flow of merchandise during the Company’s most profitable season, thereby
exacerbating the negative impact on Limited Brands’ results. Indeed, defendants later admitted that
the DC’s capacity and operational problems cost the Company approximately $80 million in the Fall
2007.
9. Despite defendants’ positive statements, the DC’s problems continued to negatively
affect the Company. Unable to fully conceal these problems, given their material impact on the
Company’s 3Q07 reported financial results, defendants began to trickle information about the true
nature of the DC’s problems into the marketplace in November 2007. Defendants disclosed that it
had “taken [them] longer than [they] had anticipated to ramp up this new DC to full capacity” and, as
- 3 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 5 of 62 PAGEID #: 235
a result, they were taking actions to reduce 4Q07 demand. Defendants, however, assured investors
that they had “expected a slow ramp up,” and that demand at VSD “ remainfed] very strong.”
Further, defendants avowed that the DC was Limited Brands’ “most significant operational priority”
and that, in any event, it could “handle spring volume” in 2008.
10. Defendants statements were, at best, misleading, as the DC’s problems continued to
materially affect the Company well into 2008. Finally, on February 28, 2008, defendants disclosed
the extent of these problems and admitted that the DC’s issues would not be resolved until June
2008. As a result of these disclosures, Limited Brands’ stock price fell nearly 15% to close at
$14.66 on February 29, 2008.
11. In addition to the DC, defendants also made false or misleading statements and
material omissions about the n2N project during the Class Period. For example, in an October 2007
edition of Apparel Magazine, defendant Turney stated that the n2N software would allow Limited
Brands to “double” its direct sales business in the next five years and would “add a lot of value to
our business.” In addition, when asked about any implementation challenges, Turney stated that
Limited Brands and n2N had encountered only “‘ the normal glitches, but nothing major.’” To the
contrary, however, the n2N project had significant “glitches” and was not proceeding as defendants
led investors to believe. From the project’s inception, Limited Brands had insisted on features and
functions beyond the scope of the original plan and failed to provide timely specifications and
documents to n2N for proper implementation of the project. In addition, throughout the Class
Period, VSD and n2N internal reports identified thousands of “issues” hindering the software’s
functionality. These issues prevented n2N from meeting its April 2007 milestones and receiving
additional funding necessary for its survival. Further, numerous witnesses have reported that all of
n2N’s demonstrations of its software, beginning in June 2007, showed that the product was not
functional and failed to meet the Company’s specifications.
- 4 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 6 of 62 PAGEID #: 236
12. Despite Turney’s positive statements, by August 2007, the start of the Class Period,
Limited Brands had already decided to abandon n2N. According to a February 2008 complaint
drafted by General Catalyst (the “GC Complaint”), attached hereto as Exhibit A, and an October 31,
2008 demand letter from the Assignee for the Benefit of Creditors of n2N to Limited Brands (the
“Demand Letter”), attached hereto as Exhibit B, by August 2007, high-level executives at Limited
Brands wanted to “shut down” n2N. Other witnesses reported that Limited Brands’ management
first considered terminating the project – due to its failing functionality tests – as early as late 2006.
In addition, according to the GC Complaint, defendants admitted in a September 2007 internal
memorandum that “‘ [t]he current working relationship between Limited Brands and n2N [was] not
efficient or effective for delivering a solution that [could] be implemented in Limited Brands within
an acceptable time frame and budget.’” Hence, contrary to experiencing only “‘the normal glitches, but nothing major,’” defendants knew that the n2N project was fast approaching failure. Defendants,
however, failed to correct their pre-Class Period statements and affirmatively misled investors to believe that the project was on track and would support VSD’s future growth. Ultimately, Limited
Brands completely abandoned the project in December 2007, having never received a functioning product. As a result of the disclosure of n2N’s failure on January 2 and 3, 2008, Limited Brands’
stock price fell over 18%, to close at $15.08 on January 9, 2008.
13. As a result of the DC and n2N projects’ numerous problems and early failures,
defendants repeated reassurances throughout the Class Period regarding the projects’ success were
false or misleading, and their August 22, 2007 3Q07 and 4Q07 earnings per share (“EPS”) guidance,
which, according to defendants, was based on these projects’ ability to support the Company’s
growth, had no reasonable basis.
- 5 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 7 of 62 PAGEID #: 237
JURISDICTION AND VENUE
14. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the
Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].
15. This Court has jurisdiction over the subject matter of this action pursuant to 28 U. S.C.
§1331 and §27 of the Exchange Act [15 U.S.C. §78a].
16. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §
1391(b). Many of the acts alleged herein, including the preparation and dissemination of materially
false and misleading information, occurred in substantial part in this District and Limited Brands
maintains its chief executive offices and principal place of business within this District.
17. In connection with the acts alleged in this complaint, defendants, directly and
indirectly, used the means and instrumentalities of interstate commerce including, but not limited to,
the mails, interstate telephone communications, and the facilities of the national securities markets.
PARTIES
18. Lead Plaintiff Plumbers and Pipefitters Locals 502 & 633 Pension Trust Fund, as set
forth in the accompanying certification, attached hereto as Exhibit C, purchased the securities of
Limited Brands at artificially inflated prices during the Class Period and has been damaged thereby
as a result of defendants’ conduct alleged herein.
19. Defendant Limited Brands is a Delaware corporation that maintains its executive
offices at Three Limited Parkway, Columbus, Ohio 43230. Limited Brands is a specialty retailer of
women’s intimate and other apparel, beauty and personal care products and accessories under
various trade names, including Victoria’s Secret and Bath & Body Works. The Company sells its
merchandise through retail stores, which are primarily mall-based, in the United States and Canada,
- 6 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 8 of 62 PAGEID #: 238
and through websites and catalogues. Through its wholly-owned subsidiary, L.B.I. Holdings, Inc.,
Limited Brands owned 39.48% of the voting stock of n2N during the Class Period.
20. Defendant Wexner is and has been Limited Brands’ Chairman of the Board of
Directors for more than 30 years and its CEO since the Company was founded in 1963. During the
Class Period, Wexner owned approximately 12.8% of Limited Brands’ outstanding common stock.
21. Defendant Burgdoerfer is and has been Limited Brands’ CFO since April 2007.
22. Defendant Redgrave is and has been Limited Brands’ Executive Vice President and
CAO since March 2005, reporting directly to defendant Wexner. Redgrave was Limited Brands’
CFO from September 2006 to April 2007. Redgrave also served as a director of n2N from
approximately June 2006 to January 2008.
23. Defendant Turney is and has been CEO and President of Victoria’s Secret Megabrand
and Intimate Apparel since July 2006. Turney also served as a director of n2N from approximately
June 2006 to January 2008.
24. Defendants Wexner, Burgdoerfer, Redgrave and Turney are referred to, collectively,
as the “Individual Defendants.”
25. As set forth and alleged in detail below, during the Class Period, because of their
senior executive positions with the Company, the Individual Defendants were directly involved in
the day-to-day operations of the Company, at the highest levels, and were privy to confidential and proprietary information concerning the Company. As senior executives of Limited Brands, the
Individual Defendants had access to adverse non-public information concerning matters alleged in
this complaint through access to internal corporate documents (including the Company’s operating plans, budgets, forecasts and reports of actual operations), communications with other corporate
officers and employees, attendance at management and Board of Directors’ meetings of Limited
Brands and n2N, and committees thereof, as well as periodic reports and other information provided
- 7 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 9 of 62 PAGEID #: 239
to them. Because of their possession of such information, the Individual Defendants knew or
recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. Except to the extent set forth in this complaint, plaintiff
and other members of the Class had no access to such information, which was, and remains, solely
under defendants’ control.
26. The Individual Defendants are liable as direct participants in the wrongs complained
of herein. In addition, the Individual Defendants, by reason of their status as senior executive
officers and/or directors, were “controlling persons” within the meaning of §20(a) of the Exchange
Act and had the power and influence to cause the Company to engage in the unlawful conduct
complained of herein. Because of their positions of control, the Individual Defendants were able to
and did, directly or indirectly, control the conduct of Limited Brand’s business.
27. As officers and controlling persons of a publicly-held company whose common stock
is registered with the SEC pursuant to the Exchange Act, traded on the New York Stock Exchange
(“NYSE”) and governed by the provisions of the federal securities laws, the Individual Defendants
each had a duty to promptly disseminate accurate and truthful information with respect to the
Company’s financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, and to correct
any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company’s publicly-traded securities would be based on truthful and accurate
information. The Individual Defendants’ misrepresentations and omissions during the Class Period
violated these specific requirements and obligations.
28. The Individual Defendants participated in the drafting, preparation, and/or approval
of the various public, shareholder and investor reports and other communications complained of
herein and were aware of, or recklessly disregarded, the misstatements and omissions contained in
- 8 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 10 of 62 PAGEID #: 240
the communications, and were aware of their materially false and misleading nature. Because of
their positions with the Company, the Individual Defendants controlled and/or possessed the
authority to control the contents of its reports, press releases and presentations to securities analysts
and through them, to the investing public. The Individual Defendants were provided with copies of
the Company’s reports and press releases alleged herein to be misleading, prior to or shortly after
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected. The Individual Defendants also made the statements alleged herein to be false and
misleading, or were present at the time the statements were made, and had the opportunity and
ability to prevent their issuance or cause them to be corrected. Thus, the Individual Defendants had
the opportunity to commit the fraudulent acts alleged herein, and each Individual Defendant is
responsible for the accuracy of the public reports and releases described herein and is, therefore,
individually and primarily liable for the representations they contained.
29. The Individual Defendants are liable as participants in a fraudulent scheme and
course of conduct that operated as a fraud or deceit on purchasers of Limited Brands common stock
by disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme: (i) deceived the investing public regarding Limited Brands’ business, DC and
technology initiatives and the intrinsic value of Limited Brands common stock; and (ii) caused
plaintiff and members of the Class to purchase Limited Brands common stock at artificially inflated
prices.
CONFIDENTIAL WITNESSES
30. The allegations herein are supported by first-hand accounts of confidential witnesses
(“CWs”). These witnesses are comprised of former employees of Limited Brands and/or its
subsidiaries employed during the Class Period and/or with knowledge of the events alleged herein.
- 9 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 11 of 62 PAGEID #: 241
The CWs provided facts from different departmental and geographic vantage points within the
Company.
31. CW1 was an Associate Merchandise Planner at VSD from May 2007 to February
2008. As a Merchandise Planner, CW 1 worked on schedules for procuring volumes of inventories
for each product sold by VSD for the DC. Because of his 1 familiarity with inventory issues, in
November 2007, CW 1 was asked to join a special team assembled in the DC tasked with fixing the
numerous problems that were inhibiting the flow of merchandise ordered by online and catalogue
customers. CW1 worked on this special project as a Financial Analyst performing work on DC
inventory issues from November 2007 until February 2008. In addition, CW1 prepared daily
reports, including Dashboard Reports and Loose Piece Reports, that tracked shipping and operational
problems in the DC. Thus, CW 1 was in a position to know the facts attributed to him throughout
this complaint and is sufficiently reliable.
32. CW2 was a Business Relation Executive (an IT position) in the Victoria’s Secret
Stores Retail Division from October 2005 to March 2009. In this position, CW2 managed the
technology and cross-functional business requests for projects related to Victoria’s Secret’s growth
plan. CW2 was responsible for over 25 projects related to the integration of “enterprise initiatives”
as part of a larger upgrade of Limited Brands’ business systems. Specifically, CW2 was involved in
merchandise planning and allocation for Bath & Body Works and was responsible for integrating
software upgrades and rolling out new systems across this organization as part of Limited Brands’
Insight project. Pursuant to these responsibilities, CW2 had direct contact with persons working on
1 The use of the words “he,” “his” and “him” in connection with CWs is not meant to be gender specific and shall also be meant to pertain to the female gender.
- 10 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 12 of 62 PAGEID #: 242
IT for the new DC. Thus, CW2 was in a position to know the facts attributed to him throughout this
complaint and is sufficiently reliable.
33. CW3 was a Director of Technology at VSD from 2000 to May 2009. In this position,
CW3 was responsible for the integration of the n2N system with Limited Brands and for building,
installing and implementing the interface and processing large volumes of data interchanged
between Limited Brands and n2N. CW3 described the n2N program as very large, involving
hundreds of Limited Brand employees along with 20 or 30 n2N employees. According to CW3, the
n2N system was intended to capture orders through the “front-end” and deliver those to the order
processing system, which ran in the VSD mainframe and routed orders to the correct location. The
n2N order capturing system was to operate via multiple channels, capturing orders from the VSD
website, phone orders to the VSD call center, and orders that were emailed or faxed. Once
distributed to the mainframe, the order processing system sent payment and financial data to Limited
Brands’ Finance Department for financial processing, then transmitted the orders to the DC to be
fulfilled. Thus, CW3 was in a position to know the facts attributed to him throughout this complaint
and is sufficiently reliable.
34. CW4 held various high-level IT jobs at Limited Brands. CW4 was a Director of
Store Systems/Enterprise Technology Operations from 2001 to 2003; a Director of Resource
Planning and Allocation from 2003 to 2005; a Program Director for Technology Services from 2005
to August 2007; and a Director of Technology Delivery at VSD from August 2007 to November
2008. As Director of Technology Delivery, CW4 headed a 30-member team that worked on
upgrading the VSD website as part of the new n2N platform. This overall program, called “Direct to
Consumer” or “DTC,” also included VSD’s new DC. CW4 reported to the Senior Vice President of
Victoria’s Secret IT, Donna Ruch (“Ruch”), who reported directly to defendants Redgrave and
Turney. Both CW4 and Ruch, along with other VSD management, attended weekly DC status
- 11 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 13 of 62 PAGEID #: 243
meetings prior to and during the Class Period. According to CW4, after the DC’s implementation in
August 2007, “nothing went as planned,” as the new system proved difficult for the DC floor
workers to use. Ongoing work performed on the new system, including software “fixes” and
ongoing software customization, was discussed at the weekly status meetings. Such discussions also
included operational topics, such as floor workers’ confusion over how to handle lost orders on the
conveyor system, misplaced inventory, conflicting information on handheld units, and other discrete
operational issues. CW4 reported that the DC’s numerous unresolved software “bugs” and
customizations were largely responsible for confusion and delays on the DC floor.
35. CW4 also attended daily n2N meetings during the Class Period. According to CW4,
after joining the n2N project in August 2007, it was immediately clear that the system was “not
going to work.” CW4 reported that daily “issues lists” in spreadsheet format identified thousands of
issues with the n2N project that required an indeterminable amount of time and resources to fix. The
issues lists identified both open and closed issues, with comments and relevant dates of discovery,
projections for resolutions and dates the issues were closed. n2N and Limited Brands held daily
meetings, sometimes two to three per day, to review these issues. Attendees included CW4, Limited
Brands Vice Presidents of IT, Vice Presidents of Marketing, various n2N representatives, and two
Deloitte representatives. According to CW4, Deloitte facilitated much of the communication
between n2N and Limited Brands executives over the progress of the program, in addition to Ruch’s
reports. CW4 stated that Ruch was embroiled in arguments with n2N during the Class Period over
the project’s myriad issues. Consequently, the project’s schedules were set back numerous times in
an effort to resolve these issues. For example, the n2N website or “storefront” was initially
supposed to “go live” in Fall 2007, but was pushed back several months later into 2008. Even then,
CW4 reported that there was no indication that the issues could be resolved in time to reach that
goal. In addition, CW4 reported that n2N’s product demonstrations, which he described as
- 12 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 14 of 62 PAGEID #: 244
“embarrassing,” were subject to thousands of issues and “not even close to workable.” Thus, CW4
was in a position to know the facts attributed to him throughout this complaint and is sufficiently
reliable.
36. CW5 was an Internet Manager at VSD from November 2006 to August 2007. Prior
to that, CW5 worked as a Marketing Assistant at VSD beginning in 1998 and worked in various
capacities on the VSD, Limited Brands and Bath & Body Works websites. As Internet Manager,
CW5 worked on business processes for the n2N platform and attended daily n2N meetings.
Specifically, CW5 worked on certain parts of the VSD website where the n2N platform was to
display images and manage multiple sets of data. CW5 reported that n2N’s demonstrations of these
functions at an August 2007 meeting showed that the product lacked functionality. CW5 further
stated that all such n2N demonstrations, which he also described as “embarrassing,” lacked
functionality and were tailored as mere show pieces. In addition, CW5 worked on testing n2N’s
product utilizing an FIP Command Center. This testing system included a “Sharepoint” application,
which documented all test results and comments on “usability testing.” CW5 reported that n2N tests
revealed many issues and defects plaguing the usability of its functions, which were documented in
spreadsheet or Word documents as a list under each function. The tests also revealed inconsistent
data. As a result, CW5 could not consistently “validate” data – a test used to determine if data from
one source is identical to that source or if the data is corrupted when used by an application.
According to CW5, consistent data was essential to the products’ functionality.
37. CW5 further reported that Limited Applications Manager Troy Blevins (“Blevins”)
and Senior Database Administrator Robert Graham (“Graham”) began making comments about
terminating the n2N project beginning in late 2006 as a result of n2N’s failed functionality test
results and data validation. By December 2006, Blevins did not think n2N could product a
- 13 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 15 of 62 PAGEID #: 245
functional system. Thus, CW5 was in a position to know the facts attributed to him throughout this
complaint and is sufficiently reliable.
38. CW6 held various high-level IT jobs at Limited Brands. CW6 was a Senior
Technical Assistant from 2000 to September 2004; a Project Consultant from September 2004 to
June 2007; and a Financial Systems Manager at V SD (an IT position) from June 2007 to 2009. As a
Financial Systems Manager, CW6 maintained VSD’s financial reporting systems. CW6 also worked
on the n2N project, where he pulled information off of VSD’s existing system in order to create
interfaces for the new n2N system. In this capacity, CW6 had direct communications with Mark
Delcher (“Delcher”) and Wendy LaHaye (“LaHaye”), both former Limited Brands’ employees and
high-level technical managers at n2N. According to CW6, n2N’s software required extensive
modifications to be able to interface with VSD’s website, and n2N was not close to resolving these
modifications by Summer and Fall 2007. In addition, CW6 reported that Limited Brands had yet to
receive a functioning product from n2N by Summer and Fall 2007 and, therefore, was unable to
begin the process of integrating the new platform with VSD’s existing system. Once the n2N
product was received (if at all), it would take at least another year for n2N and Limited Brands to
interface the new platform and make it operational. Thus, according to CW6, defendants could not
have reasonably believed that the n2N platform would be operational before the end of 2008.
39. In addition, CW6 reported that Limited Brands failed to perform “parallel testing” of
the new DC system, whereby the old system remains online while problems with the new system are
discovered and resolved, before “going live” with the new system. As a result, the new DC
experienced numerous system glitches and training problems without a working back-up system,
hindering its capacity and performance. CW6 also confirmed that internal reporting was done to
apprise Limited Brands’ executives of the status of the DC and n2N projects throughout the Class
Period and that, contrary to defendants’ Class Period statements of normal problems, the actual level
- 14 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 16 of 62 PAGEID #: 246
of disarray for both projects was “way beyond normal.” Thus, CW6 was in a position to know the
facts attributed to him throughout this complaint and is sufficiently reliable.
BACKGROUND TO THE CLASS PERIOD
The n2N Venture
40. Prior to the Class Period, VSD operated on an internally created mainframe operating
system. By 2006, VSD’s burgeoning business had outgrown this antiquated system, and Limited
Brands sought to replace it with new “front-end” technology that would enable VSD to interact with
customers in real-time through online merchandising displays and e-mail promotions. VSD also
wanted this new technology to provide an e-commerce storefront, a contact center, and order
management applications, all managed by cross-channel retail workbenches. Migrating VSD off of
its outdated mainframe system was part of a larger IT initiative at Limited Brands – referred to as the
“Insight” project – to upgrade and modernize its various IT systems. The project was also part of a
program specific to VSD called “Direct to Consumer,” or “DTC,” which also included a new,
upgraded DC and software management system for VSD. Defendants knew that creating this
alternative platform was essential to the growth of VSD, which, according to defendants, was
Limited Brands’ “fastest growing channel.”
41. Rather than develop the new platform in-house, Limited Brands and VSD decided to
form a new, third-party venture funded, in part, by Limited Brands to develop the new system. In
the Spring of 2006, defendants Redgrave and Turney, along with Ruben Pinchanski (“Pinchanski”),
then Executive Vice President of Limited Brands Direct, and others, met with executives of private
equity firm General Catalyst to discuss possible joint funding of the new venture by General Catalyst
and Limited Brands. The new venture was to be a stand-alone software company that, partnering
with VSD, would create an innovative platform to power not only VSD’s web-based sales, but also,
in a later phase of the company’s operations, to be marketed to other mega-retailers. On June 12,
- 15 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 17 of 62 PAGEID #: 247
2006, Limited Brands and General Catalyst entered into a letter agreement (“Agreement”) setting
forth the terms of the new venture. The venture was incorporated as Everest Commerce, Inc. on
June 13, 2006 and soon thereafter changed its name to n2N.
42. Pursuant to the Agreement, as negotiated by defendants Redgrave and Turney, VSD
was to make substantial contributions to n2N’s platform development project, including, inter alia,
providing n2N with critical design specifications, documentation and other development support. In
addition, Limited Brands would contribute to the joint venture’s success by installing its own
employees in key positions as n2N’s founders and leaders. Accordingly, Pinchanski became n2N’s
co-founder, CEO and one of five directors, and Steven Asbaty, Vice President of Internet Sales at
Limited Brands, became n2N’s Chief Partnership Officer. In addition, LaHaye, who led Limited
Brand’s Direct to Consumer eCommerce strategy and development, became n2N’s Chief R&D and
Innovation Officer, and Delcher, a former Director of Technology at VSD, became n2N’s Vice
President of Technology Integration.
43. In addition, the Agreement ensured that Limited Brands and VSD were able to
evaluate and negotiate directly with n2N’s key vendors. Accordingly, on numerous occasions,
representatives of Limited Brands and VSD directly assured n2N’s vendors, in words or substance,
that they “should treat n2N as if it were Limited Brands because we will not let it fail.” Further,
pursuant to the Agreement, defendants Redgrave and Turney, along with Pinchanski, would serve as
n2N directors, with General Catalyst electing the remaining two directors.
44. Under these terms, General Catalyst and Limited Brands initially invested $19.8
million and $10.6 million, respectively, in the n2N joint venture. The Agreement also provided for
the possibility of an “Additional Closing” at which time the parties would make additional
investments in n2N. In order for the Additional Closing to occur, however, n2N was required to
complete certain milestones, including the tender of Release 1 to VSD for User Acceptance Testing
- 16 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 18 of 62 PAGEID #: 248
by April 23, 2007 and the development of the Release 2 Joint Work Plan by April 30, 2007.
Because n2N failed to meet these milestones, the Additional Closing never occurred.
The DC
45. At the same time, in late 2006/early 2007, Limited Brands was building a new DC for
VSD, to open in August 2007. This project involved the “back-end” of the mainframe for VSD
catalogue and online orders and a new ERP system made by Manhattan Associates (“Manhattan”)
called Pick Ticket Management System, or “PkMS.” Manhattan’s system was initially designed for
point of sale distribution – similar to a warehouse that distributes inventory to a company’s brick and
mortar stores. Because the DC was shipping to a vast number of consumer residences instead of
stores, however, this software needed to be adapted for the DTC concept. This adaptation, along
with financial enhancements to permit real-time individual invoicing instead of batch runs, required
large scale customization. In addition, the new system was to receive order information from the
VSD mainframe, determine the exact location of the inventory ordered and transmit the orders to
handheld units carried by floor workers. The handheld units would then direct the floor workers to a
particular location where they would pick up the product, take it to a conveyor system and log the
placement. Once logged, the system would send the items to the shipping department with shipping
instructions. The new system was also intended to track inventory, purchasing, receiving schedules,
and placement of inventory in the DC once it arrived, all while interacting with the new n2N
software.
46. Throughout 2007, defendants touted the new n2N and DC projects as “key strategic
imperatives” that would help drive the Company’s 2007 growth. For example, on January 31, 2007,
after announcing that VSD would “power its $1.3 billion annual direct-to-consumer business with
n2N’s on-demand software in the second half of 2007,” defendant Turney touted n2N’s software as
VSD’s “only” solution and told investors that it would “drive down operating costs”:
- 17 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 19 of 62 PAGEID #: 249
“We have concluded that there’s no competitive advantage in owning and operating a costly direct-to-consumer technical infrastructure”. . . . “Sustainable advantage comes from excellence in merchandising, marketing, and service. Only n2N can address our requirements: n2N’s breakthrough solution will empower our merchants, marketers, technologists, and client service associates to define and implement new business practices we only dream about today. And since it’s delivered on-demand as a service, we will drive down operating costs and always have access to the latest technologies and applications.”
47. Defendant Redgrave added that “‘[w]e believe n2N will reshape the retail
industry.” . . . “Having an independent technology provider focused on the large multi-channel
retailer will allow our entire industry to re-think the expensive and difficult path of building
everything ourselves. We’re pleased to join with General Catalyst Partners to enable this shift.’”
48. On March 1, 2007, after reassuring investors that defendants “remain[ed] fully
committed to [their] 12% compounded EPS growth goal,” defendant Redgrave again touted both the
n2N initiative and new DC as “key strategic imperatives” driving Limited Brands’ projected 2007
growth:
Taking a minute to look at this future growth and specifically 2007, we remain focused on the six key strategic imperatives that we presented at our Investor Relations update meeting in November.
* * *
Our fourth growth imperative relates to our investment in infrastructure to support our future growth. We are very focused here on two primary initiatives. First is the enterprise-wide multiyear project to standardize and upgrade our technology in three areas. Shared services, customer relationship marketing, and supply chain.
* * *
Second is our initiative to support the growth of our direct businesses through the construction of a new distribution center and the development of new front-end technology. This activity, which began late last year, will continue into 2010.
49. Defendant Redgrave continued to tout these initiatives on May 24, 2007, telling
investors that Limited Brands was “investing in new technology and distribution center capacities to
- 18 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 20 of 62 PAGEID #: 250
support the growth of both [its] existing Victoria’s Secret direct business and [its] new Bath & Body
Works direct business,” and that defendants “remain[ed] confident [these investments] [would]
deliver future positive returns.”
50. In addition, on June 25, 2007, defendant Redgrave continued to highlight the
Company’s technology and IT system initiatives, including the n2N venture and new DC, as growth
drivers for the Company:
The fourth initiative [driving 2007 growth] is really around building infrastructure. And we could talk about this all day long. But the fact is, is we are investing and rearchitecting the systems and processes of the enterprise, supply chain systems, store-based systems, customer relationship management systems, shared services type of capabilities for the enterprise as a whole, to really position us and to enable us to grow at the rate that we’re targeting to grow.
* * *
These are the drivers of overall EPS growth that we are targeting in our long-range plan to add up to that 10% to 15% annual growth, or the targeted growth rate of 12% compounded that I showed you on the very first slide, and the 15% return on invested capital.
51. Further, on July 23, 2007, n2N issued a press release stating that “Victoria’s Secret
Direct will begin to operate its $1.4 billion direct-to-consumer business on n2N’s on-demand
platform in the second half of 2007.” In the press release, defendant Turney continued to tout n2N’s
software, stating, “‘[Limited Brands’] decision to embrace the n2N platform was strongly influenced
by the promise of ongoing technology innovation.” . . . “n2N’s impressive Platform Innovation
Ecosystem is a key element in ensuring a robust infrastructure on which we can grow our business
for many years.’”
DEFENDANTS’ FALSE AND MISLEADING STATEMENTS
52. By August 22, 2007, the start of the Class Period, defendants knew that neither the
DC or n2N projects would drive the Company’s growth as defendants had led investors to believe.
Defendants, however, failed to correct their prior statements and continued to make positive, albeit
- 19 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 21 of 62 PAGEID #: 251
false or misleading, statements about the n2N and DC projects, and their ability to drive the
Company’s growth, throughout the Class Period.
53. On August 22, 2007, Limited Brands issued a press release announcing reported EPS
for the second quarter ended August 4, 2007 (“2Q07”). In the press release, the Company stated
“that it [was] comfortable with First Call consensus earnings per share estimates for the third and
fourth quarters of $0.04 and $1.18, respectively. ”2 According to the press release, “[t]his outlook
includ[ed] the impact of all the previously announced transactions and initiatives and our view of
fall business performance,” including the n2N and DC initiatives.
54. The next day, August 23, 2007, Limited Brands held an earnings conference call to
discuss its 2Q07 results. During the conference call, defendant Burgdoerfer reiterated the
Company’s 3Q07 and 4Q07 earnings guidance:
Now turning to the specifics on third quarter and fourth quarter guidance, we are comfortable with the current First Call consensus earnings estimates of $0.04 for the third quarter and $1.18 for the fourth quarter. The third quarter estimate is predicated on flat comp store sales versus a 16% increase last year, and a sales decline in the low single digits.
55. In addition, defendant Redgrave announced that the Company had “just opened a
brand-new distribution center to support the growth of both the existing Victoria’s Secret direct
business and the new Bath & Body Works direct business.” Defendant Turney added that,
although total segment operating income for Victoria’s Secret had declined 13% in the second
quarter, due, in part, to expenses associated with the new DC, “ [t]hese investments support the
future growth of [Victoria Secret’s] direct business.” In addition, defendant Turney reassured
investors that the DC was experiencing only “normal implementation issues”:
2 Defendants’ false and misleading statements in quotations are in bold throughout.
- 20 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 22 of 62 PAGEID #: 252
[T]he catalog and the Internet channel continues to be an important part of the 360- degree aspect we provide our customers and we maintained momentum through the second quarter in the direct channel.
We are pleased that our new state-of-the-art distribution center opened in August, and that the new 1 million square foot distribution center will support the long-term expansion of the direct channel. The new DC has capacity to handle over 40% more volume than our old DC. We are still in the midst of a controlled start of the new distribution center, while we continue to work through normal implementation issues, we are excited about the expanding capabilities the new facility will provide us, from an operational perspective.
56. As a result of defendants’ positive August 22 and 23, 2007 statements regarding the
new DC, Limited Brand’s stock price increased 6.47%, to close at $22.77 on August 23, 2007.
57. Analysts responded favorably to defendants’ statements. For example, on August 24,
2007, Jefferies & Company, Inc. reported that defendants’ “comfort with 2H ’07 expectations is a
positive.” Similarly, on August 24, 2007, CL King & Associates reported that, based on defendants’
representations, “[e]xpenses related to technology and construction of the new VS Direct DC will
not exist in FY08.”
58. Defendants’ August 22 and 23, 2007 statements were false and misleading and their
guidance without reasonable basis. As detailed in ¶¶98-106, and contrary to their claim of “ normal
implementation issues,” defendants knew by August 22, 2007, that the DC was experiencing
significant software and operational problems resulting in numerous shipment errors and “lost”
items. According to CW6, Limited Brands failed to properly test the new DC system prior to its
August 2007 implementation. Normally, to implement such a comprehensive and complex new
system, Limited Brands would conduct “parallel testing,” whereby the old system continued to
operate while glitches and issues were discovered and resolved as the new system came online.
With the DC, however, Limited Brands simply turned off the old system and “went live” on the new
system without testing for or resolving any of its problems. As a result, the DC experienced
numerous software and training problems without a working backup system. According to CW4, the
- 21 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 23 of 62 PAGEID #: 253
problems were so substantial that in the months following the DC’s August 2007 implementation, its
daily volume was less than that of the prior system. Consequently, by August 2007, Limited Brands
had employed a special team tasked specifically with fixing the pervasive problems plaguing the DC.
59. In addition, defendants knew that the n2N project was not proceeding as defendants
had previously led investors to believe. From its inception, Limited Brands had insisted on features
and functions far beyond the scope of the original plan and failed to provide timely specifications
and documentation for proper implementation of the project. As a result, n2N was unable to meet its
April 2007 milestones, and, therefore, receive necessary additional funding. Moreover, according to
CW3, CW4 and CW5, n2N’s demonstrations for Limited Brands, beginning in June 2007, showed
that the product was not functional and failed to meet the Company’s specifications. CW4
confirmed that by August 2007, it was clear from daily internal “issues lists” that n2N’s software
was not going to work.
60. As a result of the problems affecting the DC and n2N projects, defendants’ 3Q07 and
4Q07 EPS guidance of $0.04 and $1.18, respectively, which, according to defendants, was based on
these technology initiatives, lacked reasonable basis.
61. On September 5, 2007, Limited Brands presented at a Goldman Sachs 14th Annual
Global Retailing Conference. At the conference, Senior Vice President of Limited Brands Investor,
Media, and Community Relations, Tom Katzenmeyer (“Katzenmeyer”), an authorized spokesperson
for the Company, continued to tout VSD’s business and technology initiatives, including the DC and
n2N projects:
We also think we have significant growth opportunities in internet and the internet and catalog business. And we’re investing in new front-end internet and call center systems from all our direct channel businesses at this point in time. In fact, we just opened a brand new distribution center to support that growth in Columbus. That happened in the month of August. We also have major technology initiatives going on in the supply chain, shared services, and customer relationship marketing area.
- 22 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 24 of 62 PAGEID #: 254
62. On September 6, 2007, Limited Brands issued a pre-recorded message regarding its
August 2007 sales results. In the message, Vice President of Limited Brands Investor Relations,
Amie Preston (“Preston”), an authorized spokesperson for the Company, told investors that the new
DC had experienced some delays in shipment times, resulting in a decrease in net VSD sales.
Preston told investors, however, that the DC would “be operating under normal ship times by the
end of September [2007]” and to expect a “significant increase in September sales”:
Turning to Victoria’s Secret Direct – as you know, we transitioned to a new distribution center in August. As a result we experienced delays in shipment times. While we anticipated some delay, it is taking longer than we initially anticipated to get the new DC to full capacity and as a result the ship time is currently longer than we anticipated. Demand from customers as measured by orders received was roughly flat for the month of August. However, sales are not recognized until orders are received by customers. As a result of the shipping delays Victoria’s Secret Direct net sales were down 64% to last year in August.
At this time we anticipate that the DC will be operating under normal ship times by the end of September and we expect a significant increase in September sales versus last year as we clear the current backlog. The August gross margin rate was down significantly at Victoria’s Secret Direct and below expectations due to incremental costs associated with upgrading shipments to customers and labor costs to stabilize the DC operations.
63. These statements were false or misleading because, as detailed in ¶¶98-106, they
failed to disclose the DC’s significant operational problems. According to CW 1 and CW2, the new
DC systems required substantial training to operate them properly. Limited Brands and VSD,
however, failed to adequately train the DC staff prior to the DC’s implementation in August 2007,
resulting in confusion and delays on the DC floor. In addition, unresolved software “bugs” and
ongoing software customization further hindered its functionality. As a result, the DC was
experiencing numerous shipping problems, such that defendants knew by September 6, 2007, the DC
would not be “operating under normal ship times by the end of September.”
64. On September 17, 2007, n2N issued a press release touting its technology platform.
In the press release, n2N stated that “ Victoria’s Secret Direct will begin running its $1.4 billion
- 23 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 25 of 62 PAGEID #: 255
business on n2N’s platform in early 2008.” As directors and control persons of n2N, defendants
had the ability to correct or amend this public statement, but did not.
65. In an interview reported in the October 2007 edition of Apparel Magazine, defendant
Turney told readers that the n2N software would allow Limited Brands to “ double” its direct sales
business in the next five years and that: “ Overall, we’re very excited about the implementation.
It’s going to add a lot of value to our business. We’re very dedicated to it. We’ve got a lot of
people focused on it, and I think it is going to set us up for growth for the future.” When
specifically asked about any implementation challenges regarding the n2N software, Turney told the
interviewer that Limited Brands had encountered only “ ‘the normal glitches, but nothing major’”:
[Apparel Magazine]: What challenges have you encountered, if any, so far in your testing and implementation process? What has been the company’s experience from the perspective of change management?
[Sharon Turney]: You know, it’s interesting. The teams have really worked very closely together in terms of change management. Everybody is pretty excited about how much more efficient everything will be.
As far as the testing goes, there’ve been the normal glitches, but nothing major.
66. As detailed in ¶¶107-118, defendants’ September and October 2007 statements
regarding n2N were false or misleading and failed to disclose the n2N project’s numerous failures.
According to the GC Complaint, by August 2007, Limited Brands already wanted to “shut down”
n2N. CW4 confirmed that it was clear by August 2007 that the n2N system was not going to work.
Spreadsheets tracking n2N’s progress identified thousands of functionality “issues” that required an
indeterminable amount of time and resources to fix. Further, none of n2N’s demonstrations of the
software, which CW4 and CW5 described as “embarrassing,” were even close to workable. In
addition, according to the GC Complaint and CW4, Limited Brands continued to make major
architectural changes to the software’s design, causing development to start over again for
components of the platform and further hindering the project’s progress. Moreover, according to - 24 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 26 of 62 PAGEID #: 256
CW6, n2N’s software required extensive ongoing modifications to be able to interface with VSD’s
website. CW6 reported that n2N was not even close to completing these modifications by Fall 2007.
As a result of these numerous issues, from August to November 2007, the entire “go live” schedule
for n2N was pushed forward at least three times. Even with a revised “go live” date well into 2008,
however, CW4 reported that there was no indication that the thousands of issues plaguing the n2N
project would be resolved in time to meet that deadline. And, according to CW6, even if Limited
Brands had received a functioning product by Fall 2007 (it had not), it would still take another year
to interface the new platform for it to be operational. Consequently, defendants could not have
reasonably believed that the n2N project would be operational prior to the end of 2008.
67. In addition, according to the GC Complaint, defendants admitted in a September 10,
2007, draft internal memorandum that “‘[t]he current working relationship between Limited Brands
and n2N is not efficient or effective for delivering a solution that can be implemented in Limited
Brands within an acceptable time frame and budget.’” Thus, contrary to experiencing only “‘the
normal glitches, but nothing major,’” defendants knew that the n2N project was failing.
68. On October 11, 2007, Limited Brands issued a pre-recorded message regarding its
September 2007 sales results. In the message, Preston downwardly revised the Company’s
previously announced 3Q07 guidance of $0.04 to a range of $0.00 to $0.04. Preston, however,
reassured investors that the Company had “made significant progress in September” and that the
DC was “now operating under normal ship times”:
We now expect third-quarter earnings per share to be between $0.00 and $0.04 per share versus our previous expectation of $0.04 per share.
* * *
Turning to Victoria’s Secret Direct, as you know, we transitioned to a new distribution center in August and experienced delays in ship times in August and into September. August sales were down 64% as a result. We made significant progress in September and sales were up 27% to last year. The distribution center
- 25 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 27 of 62 PAGEID #: 257
is now operating under normal ship times and we are targeting to offer the full range of shipping options including one day by the end of October.
69. The DC, however, was not “operating under normal ship times” by October 11, 2007.
To the contrary, the DC continued to experience severe systemic and operational problems resulting
in the shipment to many customers of the wrong products, the wrong quantities or no items at all.
According to CW1, these problems, which began in August 2007 with the DC’s implementation,
persisted until February 2008 and significantly inhibited the shipment and flow of merchandise. As
set forth in ¶¶103-104, 120-122, 125, defendants were aware of these problems via daily reports.
70. Despite the DC’s ongoing problems, defendants continued to tout the Company’s
business, particularly heading into the fourth quarter, which typically accounted for over one third of
the Company’s annual sales and the bulk of its operating income. On October 16, 2007, defendant
Wexner presented at an all-day analysts’ meeting in Columbus, Ohio. During the meeting, Wexner
told analysts that the Company was “better planned than [it had] ever been going into [the] holiday
[season],” and that defendants “d[id]n’t see any inventory problems”:
I think we are better led and better planned than we have ever been going into holiday for many years. . . . We are drastically better planned than last year. . . . There is no overhang or distractions from systems installations, inventory is reduced in line and we don’t see any inventory problems. If the inventory and the merchandise have been thoughtfully planned – hopefully it is and will be desired by our customers – I think we could and should have a very good holiday and hopefully we will get more of our fair share. We enter into it very clear eyed, very controlled, very disciplined and very well thought out in our merchandising.”
In addition, defendant Wexner described the Company’s planning as “ conservative, though we
didn’t pull in our horns completely. It’s sounder but still conservative. . . . I feel very confident and
very much at ease going into this holiday season.”
71. Analysts reported favorably based on defendants’ representations. For example, on
October 12, 2007, CL King & Associates reported that “[t]he DC achieved normal shipping times in
the second half of September.” On October 17, 2007, The Buckingham Research Group reported
- 26 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 28 of 62 PAGEID #: 258
that, with regard to the DC issues, “[t]he glitches are being worked out and third day air shipments
back in place. Next and second day shipping options are expected to be restored by the end of
October.” Similarly, on October 17, 2007, Cowen and Company reported:
“Investment in DC to support future growth initiatives. Management reaffirmed progress in its transition to a new DC which caused a hiccup to VSD sales in Aug., but rebounded in Sept . . . . Management continues to expect normal ship times and are on track to offer the full range of shipping options (including expedited shipping) by the end of Oct. We anticipate the new DC (+40% more capacity) should be sufficient to support LTD’s future growth initiatives.”
72. On October 25, 2007, Katzenmeyer and Preston presented on behalf of Limited
Brands at the SIG 3rd Annual Consumer Focus Forum. During the forum, Preston reiterated the
Company’s 2007 guidance, stating: “we’re targeting 12% plus growth in earnings per share and
we have several opportunities for growth across both of our businesses.”
Investors Begin to Learn the Truth About the DC
73. On November 8, 2007, Limited Brands issued a pre-recorded message regarding its
October 2007 sales results. In the message, Preston reported that “October comps on a calendar
basis were down 6%, below expectations for a flat comp.” In addition, Preston told investors that,
“[a]lthough demand remains very strong,” the progress in ramping up capacity at the DC was
slower than expected and, as a result, the Company was taking actions to reduce 4Q07 demand and
sales:
Turning to Victoria’s Secret Direct, as we’ve previously communicated, we transitioned to a new distribution center in early August and experienced delays in ship times in the third quarter. August sales were down 64% and September sales were up 27% as we cleared throughout some of the August backlog. August and September margins were also negatively impacted due to incremental costs to stabilize the DC and upgrading shipments to customers.
* * *
Our progress in ramping up capacity at the DC has been slower than expected. Although demand remains very strong, we want to insure that we don’t disappoint our customers. And, therefore, we have taken actions, including reducing catalog circulation which will significantly reduce fourth-quarter demand and sales. - 27 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 29 of 62 PAGEID #: 259
74. In response to defendants’ partial disclosures concerning the difficulties with the new
DC and its impact on sales, the price of Limited Brands common stock fell over 13% over the next
two trading days, from $20.61 on November 7, 2007 to $17.94 on November 9, 2007, on heavy
trading volume. The stock price remained inflated, however, as a result of defendants’ positive,
albeit misleading, reassurances of “ very strong” demand and their failure to fully disclose the
negative affects of the DC and n2N projects on VSD’s and Limited Brands’ operations.
75. On November 20, 2007, Limited Brands issued a press release reporting its earnings
for 3Q07. According to the press release, EPS for 3Q07 were $0.03, below defendants’ August 22,
2007 guidance. With respect to 4Q07, the press release downwardly revised its previously stated
EPS guidance to a range of $0.90 to $1.05 due, in part, to “issues related to the opening of a new
distribution center.”
76. Later that day, on November 20, 2007, defendants held an earnings conference call
with analysts to discuss the results. On the conference call, defendant Burgdoerfer reiterated the
Company’s decreased 4Q07 EPS guidance of $0.90 to $1.05, stating that it was “primarily
attributable to a reduction in our projections for Victoria’s Secret [D]irect.” Defendant Turney
added that the 40% decline in operating income for Victoria’s Secret was also “primarily driven by
decline at Direct.” Turney reassured investors, however, that “[d]emand for the brand . . .
remain[ed] very strong” and that the DC was the Company’s “ most significant operational
priority”:
[O]ur results at Direct were negatively impacted by the delays in shipping out of our new distribution center. Demand for the brand, as evidenced by our orders from the catalog and the Internet channel, remain very strong, but sales at Direct declined 7% in the quarter, due to the increased ship times and operating income decline[d] significantly. The decline in operating income was a result of sales and related shipping and handling revenue decline. The loss of higher margin, expedited shipping options and incremental labor hired to staff the DC and work on fixing the issue. We are obviously disappointed that we’ve had to take steps to reduce this demand in the fourth quarter. However, protecting the customer experience and her satisfaction with the brand is of paramount importance. As Martyn [Redgrave] said, - 28 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 30 of 62 PAGEID #: 260
this is our most significant operational priority and we are working very hard to bring the DC up to full capacity and maintain customer satisfaction.
77. During the conference call, defendant Redgrave further discussed the DC, reiterating
that “Direct demand . . . remain[ed] very strong”:
As you know, we opened the new distribution center for Victoria’s Secret Direct in early August. As we described in our October sales call, it has taken us longer than we had anticipated to ramp up this new DC to full capacity. This has had a negative impact on our third quarter results, and we now expect that it will have an even more negative impact on our fourth quarter results.
* * *
The fact is that the hard change over the new integrated processes, mechanical equipment, and IT systems is taking us longer than expected to stabilize. We appear to have hit a limit on how much we can process through the new center and we need to be able to substantially increase our throughput to serve the volumes that we expect for holiday and January’s semi annual sale.
Direct demand at Victoria’s Secret remains very strong and we want to ensure that we don’t disappoint our customers. Therefore we have taken actions to constrain[] the volume of orders we will take, including reducing catalog circulation, which will significantly reduce fourth quarter direct demand and sales. Now, getting the direct DC up to full capacity is without question the most significant operational priority that we have. We have our best internal people, as well as outside vendor experts and independent experts evaluating the situation, and we are looking at a range of options to make changes.
* * *
Although . . . we will be negatively impacted by the issues at the Victoria’s Secret [D]irect distribution center, we do believe that our brands are very strong and that we are very well positioned with respect to our assortment, our inventory levels and expense discipline.
78. In addition, defendant Redgrave told investors that the Company was “reevaluating
the approach and timing” its other technology initiatives:
As we have previously discussed, we also have two other significant technology projects under way. As a result of the challenges that we’ve experienced with both the implementation of the supply chain systems at Bath & Body Works and the new direct distribution center, we are reevaluating the approach and timing of the supply chain systems rollout to Victoria’s Secret and Mast [ i.e. project Insight] and the development of the new front end technologies systems at Victoria’s Secret Direct.
- 29 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 31 of 62 PAGEID #: 261
79. Distinguishing between Victoria’s Secret stores and VSD, defendant Redgrave later
clarified during the conference call that defendants were only “reevaluating” the timing of the supply
chain systems in Victoria’s Secret stores (i.e., project Insight), but was conspicuously silent on the
n2N project for VSD:
[A]s I mentioned in the scripted remarks, we’re evaluating the timing of the limitation of the supply chain systems for Victoria’s Secret stores. It’s important to distinguish that on one hand we’re talking about the Victoria’s Secret Direct business, that’s the distribution center. On the other hand, which is a completely separate organization and operation, is our store’s operation, which is scheduled to implement the supply chain systems next year. As I indicated, we’re reevaluating the timing of that implementation, particularly as we look at the other priorities that we have to deliver against and it is probable that we will change that timing in order to not disrupt the Victoria’s Secret Stores business in 2008.
These statements were false or misleading and omitted material information because, as detailed in
¶¶107-118, defendants knew and failed to disclose that the n2N project was failing and that Limited
Brands intended to withdraw its business from and stop funding n2N well before November 20,
2007.
80. As a result of the disclosures about the DC, analysts questioned defendants about the
depth and magnitude of the DC’s problems and whether the problems would extend beyond 4Q07.
In response, defendant Redgrave told the analysts that they had, in fact, “ expected” the DC’s limited
capacity experienced in August, September and October 2007:
[Analyst]: . . . I guess just a question on the magnitude and depth of the problem at the DC. I mean is this a full reengineering effort we have to undertake here? And what are the chances this extends beyond 4Q and into spring, would be, A.
* * *
[Martyn Redgrave]: Jeff, in terms of the distribution center operation, just to step back and give you a little bit more perspective, because I’m sure this will be a source of a number of questions, the first thing I think you need to understand is in opening the center in August, we had expected a slow ramp up. We did in fact ramp up at about the pace that we were expecting to ramp up at, to about the end of September and into October. We saw a noise, if you will, in the operation of the center, but we didn’t see an inability to break through the volume levels that we need to break through to service holiday. - 30 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 32 of 62 PAGEID #: 262
Over the last four weeks, as we’ve evaluated the performance of the center, we’ve concluded that there are some issues there that are going to cause us to have to limit the capacity of the center – that will limit the capacity of the center as we enter into holiday. The center itself obviously is a new operation for us. For instance, it utilizes a number of new capabilities that we’ve not had in our other distribution centers . . . . We’re using a dynamic location picking system, which is very different than the static location picking systems that our traditional centers have used. We’re using new high speed multiple stage conveyor systems, new handheld and laser reading scanning technologies. All of this is kind of new to us, not necessarily new to the world in terms of the way it’s been utilized in other large scale distributions centers, but are just taking us longer than we had expected to kind of burn in these new processes, these new systems, and make sure that our associates in our distribution center fully understand how to utilize the new processes and systems.
Another point that I would give you as perspective is that the center right now is operating at about 70 to 75% of our targeted capacity. In other words, the capacity we would need to be at to fully service holidays. So that gives you a sense of the gap. . . . [W]e are obviously focused on stabilizing the systems, the processes, and the, [sic] and ensuring that our people are properly trained to operate these new systems and processes. We’re working on all aspects of that on a very realtime basis with internal and outside experts, and at this stage, it’s premature to say how long it’s going to take to fully stabilize the center and whether or not it’s going to have an impact on the spring. We do expect it will have some impact, though.
81. In addition, in response to a follow-up question from analysts inquiring whether the
DC, operating at 70% of capacity, could handle spring volume, defendant Redgrave told analysts
that it “[c]ould handle spring volume.”
82. Analysts also questioned defendants about their intentions of “ramping up” the VSD
business after slowing it down in 4Q07. Downplaying the effect of the Company’s efforts to slow
down demand, defendant Turney told investors that a ramp up was unnecessary because of “very
strong” product demand and the DC’s ability to “handle the volume”:
[Analyst]: . . . I’m just kind of curious how you go about ramping a business, or ramping back up a business like Victoria’s Secret Direct after slowing it down. In other words, do you envision a steep ramp or are you, or once you get the business stabilized, will you be more inclined to try to produce a soft ramp?
* * *
[Sharen Turney]: Basically this timeframe, this is when we really peak the business, around the holiday and semi annual sale. As we’ve come out of semi annual sea, the normal business subsides down to, all the way until we get back into semi annual. - 31 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 33 of 62 PAGEID #: 263
The piece that we feel very confident in terms of the product. The product demand has been very strong at Direct. We continue to see that opportunity in the spring season. . . .
[Analyst]: Sounds like it’s kind of a soft ramp, would that be correct?
[Sharen Turney]: Well, I don’t – the thing about it is, you’re not really having to ramp up because you’re coming out of a peak timeframe, where it, normally the volume drops. So because the volume drops, that distribution center will be able to handle that volume.
83. As a result of defendants’ positive reassurances that the DC “ [c]ould handle spring
volume” in 2008 and of “very strong” demand, despite their downward revision of 4Q07 guidance,
Limited Brand’s stock price increased over 7% over the next two days, to close at $18.06 on
November 23, 2007.
84. On December 6, 2007, Limited Brands issued a pre-recorded message reporting
November 2007 sales. Regarding the DC, Preston told investors that “[t]here ha[d] not been any
significant changes in the status of the DLL” since defendants’ November 20, 2007 earnings
conference call and that Limited Brands “ continue[d] to focus on maximizing the throughput of the
DLL for the holiday time period while at the same time evaluating solutions.”
85. Defendants November and December 2007 positive statements about the DC were
false or misleading and omitted material information because, as detailed in ¶¶98-106, the DC was
(and had been for several months) experiencing severe software and operational problems. For
example, DC workers were inadequately trained for the new systems prior to the holiday season –
Limited Brands’ busiest season. As a result of their limited training, DC floor workers had difficulty
using the new system, often resulting in erroneous shipments to customers. In addition, the DC
continued to experience significant “bugs” and software glitches through the end of 2007 and into
2008, further hindering its performance. As outlined in ¶¶103-104, 120-122, 125, internal reports
informed defendants of the DC’s numerous problems.
- 32 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 34 of 62 PAGEID #: 264
Investors Begin to Learn the Truth About n2N
86. On January 2, 2008, TechCrunch, a technology website, issued an article announcing
that n2N was “ceasing operations and that Victoria’s Secret [would] not be using its technology.”
According to the article, “‘[r]umor has it that the product [n2N] delivered for Victoria’s
Secret/Limited Brands was a total dud and VS dropped them. Almost everyone was let go late last
week.’” Ensuing articles confirmed n2N’s failure and Limited Brands’ involvement in its demise.
On January 3, 2008, Xconomy Boston reported that “[n2N] had missed a series of milestones in
delivering its technology to key customer Victoria’s Secret, prompting the lingerie firm to withdraw
its business and essentially sealing N2N’s fate.” Similarly, on January 3, 2008, Innovation Economy
reported that “the decision to shut-down n2N wasn’t made by the full board, but by Limited Brands,
which unfortunately was the company’s lead investor and primary customer.”
87. These articles disclosed, for the first time, the deterioration of the relationship
between Limited Brands and n2N and the failure of the n2N project. As a result of these disclosures,
Limited Brands stock price fell over 18% over the following six business days from $18.20 on
December 31, 2007 to $15.08 on January 9, 2008.
88. Despite the n2N project’s failure, defendants continued to mislead investors regarding
the DC. On January 10, 2008, Limited Brands issued a pre-recorded message reporting December
2007 sales. Regarding the DC, Preston told investors in the message that the Company had made
“significant progress with DC output in December and were able to achieve daily output that
surpassed our initial expectation”:
We made significant progress with DC output in December and were able to achieve daily output that surpassed our initial expectation. As a result, we were able to take some actions to regenerate demand, including reactivating a free shipping offer for the semi-annual sale and increasing our email contacts. We have a thorough understanding of the issues at the DC, and we are working to implement the solution.
- 33 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 35 of 62 PAGEID #: 265
89. As a result of defendants’ reassurances regarding the DC’s progress, Limited Brand’s
stock rose over 2%, to close at $15.39 on January 10, 2008.
90. Analysts responded favorably to defendants’ statements. For example, on January 11,
2008, CL King & Associates reported that “[t]he new VS Direct DC’s operational problems recovery
achieved greater-than-planned progress. It had significant output gains with daily output above
expectations, which enabled VS to increase its marketing and drive greater sales. Management has
a thorough understanding of the DC issues and is working to implement the solutions.”
91. On February 7, 2008, Preston again stated, in a pre-recorded message, that “ [wje
continue to make progress on addressing the operational issues related to the direct DC and are
working on implementing the solution.” As a result of this continued reassurance, Limited Brand’s
stock price increased another 3.42%, to close at $17.75 on February 7, 2008.
92. These statements were false or misleading, as they failed to disclose the full extent of
the pervasive, ongoing problems at the DC and their expected impact on Limited Brands’ and VSD’s
2007 and 2008 financial results.
93. Then, on February 27, 2008, Limited Brands issued a press release reporting fourth
quarter and full year 2007 earnings. According to the release, 4Q07 EPS were $1.10, or $0.94
excluding the impact of extraordinary items, and fiscal 2007 EPS were $1.89, or $1.21 excluding the
impact of extraordinary items. The February 27, 2008 press release also significantly lowered the
Company’s previously issued guidance for 2008, stating that the Company “now expect[ed]
February comps in the negative low double digit range versus its previous guidance for negative mid
to high single digit comps,” and “expect[ed] 2008 first quarter earnings per share to be $0.05 to
$0.10 compared to $0.13 per share last year.”
94. The next day, February 28, 2008, defendants held an earnings conference call with
analysts to discuss the disappointing 4Q07 and 2007 results. During the conference call, defendant
- 34 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 36 of 62 PAGEID #: 266
Redgrave announced that, despite their previous reassurances that the DC system “[c]ould handle
spring volume,” the DC’s capacity problems would not be resolved until June 2008:
As we look back at 2007, we are clearly disappointed with our financial performance. . . .
* * *
[I]t did take us longer than expected to get the new direct distribution center up to capacity. This resulted in a significant incremental cost in the second half of the year and forced us to proactively take steps to reduce demand in the fourth quarter.
* * *
[W]ith respect to the direct distribution center, we continue to make progress and we are focusing on two key things. Our primary focus is on the things that face the customer including being able to fully meet the volume demands at our targeted accuracy levels and offering all expedited shipping options. We are targeting to have all of these issues resolved by the June semi annual sale this year.
At the same time, we are focusing on improving our overall efficiency and productivity within the DC. In relation to this effort, we do think it will take a longer period of time before we are completely where we need to be. As a result, in 2008, we will continue to be negatively impacted by higher costs associated with lower accuracy levels running the DC and implementing the solutions.
95. In addition, defendants publicly announced that the Company would no longer
provide additional funding for or business to n2N and that, as a result, n2N had closed:
[I]n the fourth quarter we and our investment partner in the front end technology venture for Victoria’s Secret Direct [i.e. n2N] elected not to provide additional funding and that venture has closed. We are currently evaluating alternative approaches to support the VSD business.
96. In response to the disclosures concerning the impact of the difficulties with the DC
and its impact on sales, the price of Limited Brands common stock fell nearly 15% from $17.13 on
February 27, 2008 to $14.66 on February 29, 2008.
FALSITY
97. Defendants’ statements about n2N and the new DC, and their ability to drive 2007
growth, set forth above, were materially false and misleading because they misrepresented and/or
- 35 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 37 of 62 PAGEID #: 267
failed to disclose adverse events surrounding the development of the n2N technology and the new
DC, and their adverse impact on VSD’s and Limited Brands’ 2007 and 2008 financial results.
DC Statements
98. Defendants’ repeated reassurances throughout the Class Period about their progress
and capacity at the DC were false or misleading. Contrary to defendants’ August 23, 2007 claim of
“normal implementation problems,” according to CW1, the DC was experiencing numerous
implementation problems prior to and during the Class Period. The problems were so substantial
that from approximately August 2007 to February 2008, Limited Brands employed a special team
tasked specifically with fixing the various problems plaguing the DC.
99. According to CW2 and CW6, defendants failed to adequately train DC staff or test
the new systems. CW6 reported that to implement such a comprehensive and complex new system,
Limited Brands would normally conduct “parallel testing,” whereby the old system continued to
operate while the new system was brought online and glitches and issues were discovered and
resolved. With the DC, however, Limited Brands simply turned off the old system and went live
with the new system in August 2007 without any parallel testing. As a result, system glitches and
training problems remained unresolved as the new system went live, hindering its capacity and
performance.
100. In addition, according to CW2, the new automated system had significantly more
steps than the old (approximately ten steps versus two previously), and DC workers were confused
by the complexity and differences between the new and old systems. CW 1 corroborated these facts,
stating that the new DC systems required substantial training to operate properly, but many of the
DC floor staff had little training prior to its implementation or before the 2007 holiday season.
101. The lack of proper training resulted in numerous human errors at various stages of the
DC’s automated system that received orders. For example, CW 1 reported that throughout the Class
- 36 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 38 of 62 PAGEID #: 268
Period, DC floor workers often misread or misunderstood the information on their handheld devices
and filled orders with the wrong product and/or wrong quantities, resulting in erroneous shipments.
In addition, numerous orders traveling on the elaborate new conveyor system were lost on a daily
basis, either because the orders fell off or because they were taken off at the wrong location,
resulting in piles of “lost” pieces that accumulated at various locations. As a result of these
problems, the DC was not “operating under normal ship times” as defendants told investors. Rather,
customers often received the wrong products, the wrong quantities, or no items at all. Defendants
later admitted in May 2008 that the DC problems and disruption to business cost Limited Brands
approximately $80 million in Fall 2007.
102. In addition, according to CW4 and CW6, the DC was experiencing unresolved “bugs”
and software glitches throughout the Class Period. Weekly meetings informed defendants that
attempted “fixes” and customizations of the DC’s software were ongoing during 2007 and into 2008.
These problems were so substantial that in the months following the DC’s August 2007
implementation, its daily volume was less than that of the prior system.
103. According to CW 1, defendants tracked the DC’s various problems daily via different
internal reports. For example, a “Dashboard Report,” which was distributed to VSD management
every morning, showed the status on all inventory processes expressed in various metrics. This
report also included percentages of accurate orders shipped and percentages of errors made per
order. CW 1 reported that by November 2007 – the beginning of the fourth quarter, which typically
accounted for over 68% of the Company’s total annual profit – the percentage of erroneous
shipments was over 20% to 30%.
104. Defendants also tracked improvements being made to the DC processes, including the
unidentified or “lost” items that had fallen off the conveyor, via a “Loose Piece Report,” which
contained an estimate of remaining “loose pieces.” CW1 stated that it was not unusual for the
- 37 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 39 of 62 PAGEID #: 269
inventory system and Loose Piece Report to show a thousand items in inventory that had been lost
or misplaced. DC floor workers had to find these “pieces” and put them back in the correct
inventory locations as defined by the new system. According to CW1, defendant Redgrave was a
recipient of the Dashboard and Loose Piece Reports.
105. In addition, according to CW4, VSD held weekly status meetings to discuss the DC’s
problems and progress. Attendees included CW4 and Ruch, who reported directly to defendants
Redgrave and Turney, along with other VSD management.
106. As a result of its numerous problems, defendants’ repeated reassurances throughout
the Class Period regarding the DC’s “significant progress,” “normal ship times,” “very strong”
demand and sufficient capacity were false or misleading, and their August 22, 2007, 3 Q07 and 4Q07
EPS guidance, which, according to defendants, was based in part on the DC’s ability to support
growth, had no reasonable basis.
n2N Statements
107. Defendants’ statements regarding n2N were also false or misleading and failed to
correct their prior statements or disclose the project’s early failure. Despite defendants’ initial
laudatory statements of support for the n2N project and its ability to support growth, Limited Brands
and VSD hobbled the project just months into its development. According to the GC Complaint and
Demand Letter, VSD failed to timely provide the specifications and documentation regarding
software design to n2N as required by the Agreement. In addition, significant portions of the
functionality of VSD’s existing software, processes and performance criteria were completely
undocumented. These gaps in essential specifications, which were known to Limited Brands and
VSD before n2N’s launch, frustrated n2N’s design attempts and made n2N’s work far more
expensive and time-consuming than initially contemplated.
- 38 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 40 of 62 PAGEID #: 270
108. Further, defendants knew that large and critical components of VSD’s existing
software – which n2N’s software was intended to supplement – simply did not exist and had to be
build from scratch. For example, according to the GC Complaint and Demand Letter, VSD did not
have an adequate content management tool suitable for the type of platform n2N was to construct.
Such a tool organizes the content to the web-based platform – the merchandise photographs, prices,
sizes and related marketing text – without which web-based selling would be impossible. The
construction of this tool took many thousands of man-hours and increased the time and expense of
n2N’s early development efforts.
109. In addition, from the outset, Limited Brands and VSD insisted on features and
functions of the planned software that were far beyond the scope of the original plan, the Agreement
with General Catalyst, or the requirements for general marketability of the platform. Indeed,
according to the GC Complaint, defendants Redgrave and Turney admitted to General Catalyst
representatives during a September 18, 2007 n2N board meeting that Limited Brands and VSD had,
in fact, altered n2N’s focus from its original plan and caused the n2N project to be larger and more
expensive than originally planned. Moreover, in September 2007, Limited Brands and General
Catalyst agreed to have an independent consultant, Twin Technologies, evaluate n2N’s belated June
2007 Release 1 delivery. On October 19, 2007, Limited Brands presented the findings during a
telephonic meeting involving, among others, defendants Turney, Redgrave and Bergdorfer.
According to the Twin Technologies evaluation, n2N’s delays were caused by additional
functionalities requested by VSD and Limited Brands.
110. Defendants also knew that the n2N project was experiencing myriad software issues
or “bugs,” which hindered its functionality. According to CW4, by August 2007, it was clear that
the system was not going to work. Daily spreadsheets tracking the project’s progress identified
thousands of issues that required an indeterminable amount of time and resources to fix.
- 39 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 41 of 62 PAGEID #: 271
Throughout the Class Period, Limited Brands and n2N held daily meetings, sometimes two to three
per day, to review these issues. According to CW5, the “issues” or defects plaguing n2N’s
functionality were documented in spreadsheet or Word format as a list under each function. In
addition, according to CW6, the software required extensive modifications in order to interface with
VSD’s website. CW6 reported that n2N was not even close to resolving these modifications in
Summer and Fall 2007. As a result of these issues, CW4 reported that from August to early
November 2007, the entire n2N project schedule was pushed forward at least three times, pushing
the internal “go live” date well into 2008. Even with a 2008 target, CW4 stated that there was no
indication that n2N could resolve the issues plaguing the project in time to meet that deadline. CW6
corroborated these reports, stating that n2N had yet to deliver a working product by Fall of 2007.
And once a working product was received (if at all), it would take at least another year to integrate
the new platform. Thus, according to CW6, the n2N platform could not have been operational until
the end of 2008, if at all – much later than defendants led investors to believe.
111. As a result of the software’s numerous problems and Limited Brands’ failure to
provide timely specifications, n2N was unable to meet its April 2007 milestones and, therefore, the
Additional Closing contemplated in the Agreement never occurred. Defendants knew that failing to
raise additional capital was fatal to n2N’s continued viability. According to the GC Complaint, as
early as August 2006, the n2N Board of Directors, including defendants Turney and Redgrave,
received an Appraisal Report of n2N’s Non-Voting Common Stock, which indicated that “[n2N]
expect[ed] to show losses and negative cash flow until at least 2009 and expect[ed] that cash
requirements [would] total approximately $40 million before positive cash flow [was] obtained.”
112. Despite missing its April 2007 milestones, n2N delivered to Limited Brands a version
of the first release for the n2N platform in June 2007. According to CW4, n2N’s demonstrations of
its product for Limited Brands and VSD, which CW4 and CW5 described as “embarrassing,” were
- 40 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 42 of 62 PAGEID #: 272
plagued by thousands of issues and “not even close to workable.” CW3 confirmed that n2N’s
demonstrations were weak and not functional.
113. In addition, according to the GC Complaint, after n2N’s demonstrations for V SD and
Limited Brands, VSD and Limited Brands suddenly requested hundreds of additional, new
functionalities that had neither been contemplated at the start of n2N nor set forth in the Agreement.
n2N told Limited Brands that these changes would add expense and time to the project that were not
part of the original deal, and General Catalyst raised these issues to defendants in June 2007 and at a
meeting of n2N’s Board of Directors on July 18, 2007.
114. Further, defendants knew that n2N’s development was hindered by Limited Brands’
and VSD’s failure to retain the core group of their employees that served as the day-to-day contacts
with n2N. For example, on July 31, 2007, Limited Brands announced the departure of Len
Schlesinger (“Schlesinger”), Limited Brands’ former President, Chief Operating Officer and Vice
Chairman. Schlesinger had been part of the original team at Limited Brands heading the n2N
project. In addition, according to the GC Complaint, Donna Johnson and Steve Cohn, both Vice
Presidents of Limited Brands’ Web Operations, and Kate Bailey, Limited Brands’ Head Web
Merchant, all left Limited Brands at critical early stages in n2N’s development efforts. This core
group of people had been involved with n2N in designing the plans and specifications for the n2N
software and were to be instrumental in the joint venture going forward.
115. Despite these problems, defendants continued to assure investors during the Class
Period that Limited Brands was “ investing in new front-end, Internet, and call center systems for
all of our direct channel businesses” and that the n2N project would “add a lot of value to [Limited
Brands’] business.” Moreover, defendants assured investors in October 2007 that the n2N software
would allow Limited Brands to “ double” its direct sales business in the next five years and had
encountered only “‘the normal glitches, but nothing major.’” These statements, made after
- 41 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 43 of 62 PAGEID #: 273
Limited Brands determined that n2N failed to meet its April 2007 milestones and at a time when
n2N was significantly undercapitalized, experiencing severe functionality problems and hindered by
VSD’s failure to provide timely specifications, had the effect of misleading investors as to the
success of the joint venture as a driver of VSD’s growth.
116. In addition, despite their continued public appraisals of n2N, by the start of the Class
Period, defendants had already decided to abandon the project. According to CW5, Limited Brands
Applications Manager, Blevins, and Limited Brands Senior Database Administrator, Graham, began
making negative comments as early as late 2006 about terminating the n2N project due to its failing
of functionality tests. CW5 reported that by December 2006, Blevins did not believe n2N could
produce a functional system at all. In addition, according to the GC Complaint, a Limited Brands
employee told an n2N employee in August 2007 that high-level executives at Limited Brands
wanted to “shut down” n2N. Further, defendants admitted in a September 10, 2007 draft internal
memorandum that “‘[t]he current working relationship between Limited Brands and n2N [was] not
efficient or effective for delivering a solution that [could] be implemented in Limited Brands within
an acceptable time frame and budget.’” The memorandum, which stated that it was the “8th Draft
for Review and Discussion,” had clearly been circulating within Limited Brands during at least part
of Summer 2007.
117. In November 2007, Limited Brands told General Catalyst that it was considering
taking the entire development project in-house. Less than a month later, in December 2007, Limited
Brands formally told General Catalyst that neither it nor VSD would continue to support n2N.
Having lost its principal investor (Limited Brands) and only customer (VSD), n2N was forced to
close its doors in December 2007.
118. As a result of n2N’s numerous problems and early failure, defendants’ repeated
reassurances throughout the Class Period regarding its success, and their omissions regarding its
- 42 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 44 of 62 PAGEID #: 274
failure, were false or misleading, and their August 22, 2007, 3Q07 and 4Q07 EPS guidance, which,
according to defendants, was based in part on the n2N project’s ability to support VSD’s growth, had
no reasonable basis.
ADDITIONAL SCIENTER ALLEGATIONS
119. As alleged herein, defendants acted with scienter in that each defendant knew or
recklessly disregarded that the public documents and statements issued or disseminated in the name
of the Company, as set forth herein, were materially false or misleading when made. Defendants
knew that such statements or documents would be issued or disseminated to the investing public and
they knowingly and substantially participated or acquiesced in the issuance or dissemination of such
statements or documents as primary violators of the federal securities laws. As set forth herein in
detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Limited
Brands, its business and finances, their control over Limited Brands’ allegedly materially misleading
misstatements, and/or their associations with the Company, which made them privy to confidential
proprietary information concerning Limited Brands, were active and culpable participants in the
fraudulent scheme alleged herein.
120. Defendants knew about the DC’s problems throughout the Class Period through
various internal reports. According to CW1, defendant Redgrave and other VSD management
received a Dashboard Report every morning during the Class Period which showed the status of all
DC inventory processes in various metrics. The report also included the percentages of accurate
orders shipped and percentages of errors per order. CW 1 reported that by November 2007, the
beginning of the 2007 fourth quarter, the percentage of erroneous shipments was over 20% to 30%.
121. Defendants also tracked improvements being made to the DC processes, including
unidentified or “lost” items that fell off the conveyor belt, via a Loose Piece Report. CW 1 stated
that it was not unusual for the inventory system and Loose Piece Report to show a thousand items in
- 43 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 45 of 62 PAGEID #: 275
inventory during the Class Period that had been lost or misplaced. Under the new system, DC
workers had to physically find each of these “loose pieces” and put them back in the correct
inventory locations. According to CW1, defendant Redgrave, along with other VSD management,
received this report.
122. In addition, according to CW4, Limited Brands and VSD tracked and itemized the
DC’s various “defects,” performed an impact analysis of the impact to the system for each defect and
recorded an action plan to resolve the problems. The defects were rated at levels of severity, with
“Severity 1” being the worst. These reports informed defendants of the DC’s numerous problems
throughout the Class Period.
123. The status of the DC was also reported in weekly meetings during the Class Period
attended by VSD management, including Ruch and CW4. Ruch reported directly to defendants
Redgrave and Turney. According to CW4, once the DC was implemented in August 2007, “nothing
went as planned.” In the first few months after its implementation (i. e., August – November 2007),
the daily volume of the new DC was less than the prior system’s as a result of unresolved software
“bugs” and ongoing customization of the Manhattan application. In addition, the new system proved
much more difficult for DC floor staff to operate than the prior, simpler system. The software
“fixes,” additional customization and work Manhattan personnel performed on the new system were
discussed in the weekly status meetings. These meetings also included discussion of operational
issues, such as DC floor workers’ confusion over how to handle orders that were lost on the
conveyor, inventory that was out of place, conflicting information on their handheld units, and other
discrete issues.
124. Defendants also knew of n2N’s various problems and failures throughout the Class
Period. According to CW4, Limited Brands and n2N tracked n2N’s progress using daily spreadsheet
“issues lists.” CW4 reported that by August 2007, these issues lists identified thousands of issues
- 44 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 46 of 62 PAGEID #: 276
that required an indeterminable amount of time and resources to fix. The lists also included
comments, relevant dates of discovery, projections for resolutions and dates issues were closed.
During this time, Limited Brands and n2N held daily meetings, sometimes two to three meetings per
day, to review n2N’s myriad issues, attended by Limited Brands Vice Presidents of IT and
Marketing (including CW4), various n2N representatives and two Deloitte representatives.
According to CW4, Deloitte facilitated much of the communication between n2N and Limited
Brands executives regarding the project’s progress, in addition to Ruch’s reports.
125. CW6 confirmed that reporting was done internally to apprise Limited Brands’
executives about the status of the DC and n2N projects throughout the Class Period. According to
CW6, defendants’ statements that the Company was experiencing only normal problems with the
n2N and DC projects were untrue, as the actual level of disarray for both projects was “way beyond
normal.”
126. In addition, CW4 reported that from August to November 2007, the entire n2N
project schedule was pushed forward at least three times. For example, the “go live” date for the
website or “storefront” portion of the project was initially scheduled for Fall 2007, but had to be
rescheduled for several months later well into 2008. Even then, CW4 stated that there was no
indication that the project’s issues could be resolved in time to reach that goal. CW6 corroborated
these reports, stating that even if Limited Brands had received a functional product by Fall 2007 (it
had not), it would still take another year before the platform was interfaced and operational. Thus,
defendants could not have reasonably believed that the n2N platform would be operational even by
the end of 2008.
127. Moreover, n2N’s demonstrations for Limited Brands and VSD, beginning in June
2007, showed that the product was not functional. According to CW4, n2N’s demonstrations, which
several CWs have described as “embarrassing,” were plagued by thousands of issues and “not even
- 45 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 47 of 62 PAGEID #: 277
close to workable.” CW5 confirmed these reports, stating that the demonstrations were tailored to
show pieces of a function, but none of the software actually worked.
128. Further, according to CW5, Limited Brands tested n2N’s deliverables using its own
“FlP Command Center” and documented the results and comments on a “Sharepoint” application.
Limited Brands’ tests identified many issues or defects plaguing the software’s functionality, which
were then documented in spreadsheet or Word format as a list under each function. These tests also
revealed that the n2N software data was inconsistent and was being corrupted when used by an
application. According to CW5, without consistent data, the software was not functional.
129. Defendants’ motive and opportunity also support an inference of scienter. According
to Limited Brands’ April 16, 2007 Proxy Statement, defendants’ received substantial incentive
compensation ( i. e., bonuses) based, in part, on Limited Brands’ stock price. Thus, defendants were
incentivized to inflate the Company’s stock price in order to receive larger bonuses for themselves.
Defendants also had the opportunity to commit the acts complained of herein, as they made the
statements alleged to be misleading and/or participated in the drafting, preparation and approval of
such statements, and had the opportunity and ability to prevent their issuance or cause them to be
corrected.
130. In addition, defendants, as senior executives of Limited Brands and VSD, can be
presumed to have knowledge of adverse facts affecting the Company’s business. According to
defendants, VSD was Limited Brands “fastest growing channel,” and the new DC and n2N
initiatives were essential elements for its growth. As Limited Brands’ CEO, CFO, CAO and
Victoria’s Secret’s CEO and President, the Individual Defendants can be presumed to have
knowledge of the adverse facts outlined throughout this Complaint affecting this core operation.
Further, according to a December 12, 2007 JP Morgan report, defendant Wexner was “very involved
in [Limited Brands’] strategic direction.”
- 46 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 48 of 62 PAGEID #: 278
131. Defendants were also aware of the problems with n2N based on their positions with
n2N and their control of the venture and project. Limited Brands was n2N’s principal investor and
only customer during the Class Period, and had substantial control over the venture. Indeed,
according to the GC Complaint, defendant Redgrave repeatedly stated “‘[y]ou are us and we are
you’” when referring to the relationship between Limited Brands and n2N, underscoring Limited
Brands’ control of n2N. Limited Brands and VSD were also able to evaluate and negotiate directly
with n2N’s key vendors and represented to vendors that they “‘should treat n2N as if it were Limited
Brands.’” In addition, Limited Brands was actively involved in the project and was responsible for
substantial contributions, including providing n2N with design specifications, documentation and
other development support and installing its own employees in key positions as the founders and
leaders of n2N. Based on their involvement and control of n2N, defendants can be presumed to have
knowledge of the adverse facts outlined herein affecting the n2N project. Moreover, defendants
Turney and Redgrave, as directors of n2N during the Class Period, were directly informed of the
problems affecting the project.
132. The timing of the DC and n2N problems also supports an inference of scienter. The
problems affecting the DC and n2N projects continued to impact the Company into its 2007 fourth
quarter, or the holiday season. Limited Brands is heavily dependent on its fourth quarter, which
typically accounts for over one third of its annual sales and the bulk of its operating income. Any
internal problems affecting this quarter would be of high importance to defendants. Indeed,
defendants admitted in the Company’s 2007 Form 10-K that “[a]ny decrease in sales or margins
during [the fourth quarter] could have a disproportionate effect on the Company’s financial condition
and results of operations.” Additionally, defendant Wexner admitted during an October 16, 2007
analysts’ meeting that defendants entered 4Q07 “very clear eyed.” Thus, defendants can be
- 47 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 49 of 62 PAGEID #: 279
presumed to know of the significant problems outlined herein facing the Company during this
quarter.
LOSS CAUSATION/ECONOMIC LOSS
133. The market for Limited Brands’ common stock was open, well-developed and
efficient at all relevant times. During the Class Period, as detailed herein, defendants engaged in a
scheme to deceive the market and a course of conduct that artificially inflated the price of Limited
Brands’ common stock and operated as a fraud or deceit on Class Period purchasers of Limited
Brands common stock by failing to disclose to investors the full extent of the ongoing and pervasive
problems with the DC and n2N projects. As a result of the materially false and misleading
statements and omissions described above, Limited Brands’ common stock traded at artificially
inflated prices during the Class Period and until the truth began to be revealed to the market. Had
the true facts been disclosed, Limited Brands’ stock price would have decreased substantially.
Investors who purchased Limited Brands’ stock at these fraud-inflated prices were damaged by
paying too much as reflected in the price declines of Limited Brands’ stock following the adverse
disclosures detailed above.
134. On November 8, 2007, the Company announced that the progress in ramping up
capacity at the DC was slower than expected and that it was taking actions to reduce 4Q07 demand
and sales. As a result of this partial disclosure, Limited Brands’ stock price fell over 13% in the next
two trading days, to close at $17.94 on November 9, 2007. The Company’s stock price remained
artificially inflated, however, due to defendants’ false and misleading statements.
135. On January 2, 2008, TechCrunch issued an article announcing that n2N was ceasing
operations and that Limited Brands and VSD would not be using its technology. Other articles
issued the following day confirmed this announcement. These articles disclosed, for the first time,
the deterioration of the relationship between Limited Brands and n2N and the failure of the n2N
- 48 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 50 of 62 PAGEID #: 280
project. As a result of these disclosures, the Company’s stock price fell over 18% over the following
six trading days to close at $15.08 on January 9, 2008.
136. On February 28, 2008, defendants announced that the DC issues would not be
resolved until June 2008 and that the Company would “continue to be negatively impacted by higher
costs associated with lower accuracy levels running the DC and implementing the solutions” in
2008. As a result of these disclosures, the Company’s stock price fell nearly 15% to close at $14.66
on February 29, 2008.
137. At all relevant times, the material misrepresentations and omissions particularized in
this complaint directly or proximately caused, or were a substantial contributing cause of, the
damages sustained by plaintiff and other members of the Class. As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Limited Brands’ IT initiatives and financial condition. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
positive assessment of Limited Brands and its business, financial condition, prospects and
operations, thus causing the Company’s common stock to be overvalued and its price artificially
inflated at all relevant times. Defendants’ materially false and misleading statements during the
Class Period resulted in plaintiff and other members of the Class purchasing the Company’s
common stock at artificially inflated prices, thus leading to their losses when the deception was
revealed and the market was able to accurately value the Company’s shares.
CLASS ACTION ALLEGATIONS
138. Plaintiff brings this action as a class action pursuant to Rules 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of all persons who purchased Limited Brands common
stock during the Class Period (the “Class”). Excluded from the Class are defendants, persons
serving as officers and directors of the Company during the relevant time period, members of each of
- 49 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 51 of 62 PAGEID #: 281
their immediate families and their legal representatives, heirs, successors or assigns, and any entity
in which any of the foregoing have or had a controlling interest.
139. The members of the Class are so numerous that joinder of all members is
impracticable. As of March 21, 2008, Limited Brands had more than 300 million shares of common
stock outstanding, which were actively traded on the NYSE. While the exact number of Class
members is unknown at the present time and can only be ascertained through appropriate discovery,
plaintiff believes that there are thousands of members in the proposed Class and that they are
geographically dispersed. Record owners and other members of the Class may be identified from
records maintained by Limited Brands or its transfer agent, and members of the Class may be
notified of the pendency of this action by mail, using a form of notice similar to that customarily
used in securities class actions.
140. Plaintiff’s claims are typical to the claims of all members of the Class. All members
of the Class are similarly affected by defendants’ wrongful conduct in violation of federal law that is
complained of herein and have incurred substantial damages in connection therewith.
141. Plaintiff will fairly and adequately protect the interests of the Class members and has
retained counsel who are competent and experienced in both class action and securities litigation.
Plaintiff has no interests which conflict with those of the Class members they seek to represent.
142. Common questions of law and fact exist as to all Class members and predominate
over any questions that may affect only individual Class members. Among the questions of law and
fact common to the Class are:
(a) whether defendants’ acts, as alleged herein, violated the federal securities
laws;
- 50 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 52 of 62 PAGEID #: 282
(b) whether statements made by defendants to the investing public during the
Class Period omitted and/or misrepresented material facts about Limited Brands’ business,
operations and financial performance;
(c) whether defendants breached any duty to convey material facts or to correct
material facts previously disseminated;
(d) whether defendants participated in and pursued the fraudulent scheme or
course of conduct complained of;
(e) whether defendants acted willfully, with knowledge or recklessly, in omitting
and/or misrepresenting material facts;
(f) whether the market price of Limited Brands’ securities were artificially
inflated during the Class Period due to the material misrepresentations and omissions complained of
herein; and
(g) whether the members of the Class have sustained damages and, if so, the
appropriate measure of damages.
143. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy, since joinder of all members is impracticable. Further, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE
144. Plaintiff relies, in part, on the presumption of reliance established by the fraud-on-the-
market presumption.
145. At all relevant times, the market for Limited Brands’ common stock was an efficient
market for the following reasons, among others: - 51 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 53 of 62 PAGEID #: 283
(a) Limited Brands’ stock met the requirements for listing, and was listed and
actively traded on the NYSE, a highly efficient and automated market;
(b) as a regulated issuer, Limited Brands filed periodic public reports with the
SEC and the NYSE that contained material misrepresentations and/or omitted material facts during
the Class Period as alleged herein, causing Limited Brands stock to trade at artificially inflated
prices;
(c) Limited Brands regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases on
the national circuits of major newswire services and through other wide-ranging public disclosures,
such as communications with the financial press and other similar reporting services;
(d) Limited Brands was followed by several securities analysts employed by
major brokerage firm(s), who wrote reports that were distributed to the sales force and certain
customers of their respective brokerage firm(s). Each of these reports was publicly available and
entered the public marketplace. In writing these reports, analysts reflected information provided by
defendants; and
(e) the trading volume of Limited Brands common stock was substantial during
the Class Period, indicating that there was a liquid market for Limited Brands common stock during
the Class Period.
146. As a result of the foregoing, the market for Limited Brands securities promptly
digested current information regarding Limited Brands from all publicly available sources and
reflected such information in Limited Brands’ stock price. Under these circumstances, all purchasers
of Limited Brands common stock during the Class Period are entitled to a presumption of reliance
because they all suffered similar injury through their purchase of Limited Brands’ common stock at
artificially inflated prices.
- 52 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 54 of 62 PAGEID #: 284
NO SAFE HARBOR
147. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Most of the specific statements pleaded herein were not identified as and were not “forward-looking
statements” when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein,
defendants are liable for those false or misleading forward-looking statements because at the time
each of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized and/or
approved by an executive officer of Limited Brands who knew that those statements were false when
made.
COUNT I
For Violation of §10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants
148. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein. This claim is asserted against all defendants.
149. During the Class Period, Limited Brands and the Individual Defendants carried out a
plan, scheme and course of conduct which was intended to and did: (a) deceive the investing public,
including plaintiff and other Class members, as alleged herein; (b) artificially inflate and maintain
the market price of Limited Brands’ common stock; and (c) cause plaintiff and other members of the
Class to purchase Limited Brands’ securities at artificially inflated prices. In furtherance of this
unlawful scheme, plan and course of conduct, defendants, and each of them, individually took the
actions set forth herein. - 53 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 55 of 62 PAGEID #: 285
150. Defendants, either individually or as a group: (a) employed devices, schemes, and
artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts
necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of
business which operated as fraud and deceit upon the purchasers of the Company’s securities in an
effort to maintain artificially high market prices for Limited Brands’ securities in violation of § 1 0(b)
of the Exchange Act and Rule 1 0b-5 promulgated thereunder. All defendants are sued as primary
participants in the wrongful and illegal conduct charged herein and as controlling persons, as alleged
below.
151. In addition to the duties of full disclosure imposed on defendants as a result of their
dissemination of affirmative statements, or participation in the making of affirmative statements to
the investing public, they each had a duty to promptly disseminate truthful information that would be
material to investors in compliance with the integrated disclosure provisions of the SEC as embodied
in SEC Regulation S-X [17 C.F.R. §§210.01 et seq.] and SEC Regulation S-K [17 C.F.R. §§229.10
et seq. ] and other SEC regulations, including accurate and truthful information with respect to the
Company’s operations, financial condition and performance so that the market price of the
Company’s common stock would be based on truthful, complete and accurate information.
152. Defendants, individually and as a group, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or the mails engaged and participated in a continuous
course of conduct to conceal adverse material information about the business, operations and future
prospects of Limited Brands as specified herein.
153. Defendants employed devices, schemes and artifices to defraud, while in possession
of material adverse non-public information and engaged in acts, practices, and a course of conduct as
alleged herein in an effort to assure investors of Limited Brands’ value and performance and
continued substantial growth, which included the making of, or the participation in the making of,
- 54 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 56 of 62 PAGEID #: 286
untrue statements of material facts, and omitting to state material facts necessary in order to make
the statements made about Limited Brands and its business operations and future prospects, in the
light of the circumstances under which they were made, not misleading as set forth more particularly
herein, and engaged in transactions, practices and a course of business which operated as a fraud and
deceit upon the purchasers of Limited Brands’ common stock during the Class Period.
154. Each of the Individual Defendant’s primary liability, and controlling person liability,
arises from the following facts: (a) he or she was a director and/or high-level executive at the
Company during the Class Period and a member of the Company’s management team; (b) by virtue
of his or her responsibilities and activities as a senior officer of the Company, he or she was privy to
and participated in the creation, development and reporting of the Company’s internal budgets, plans
and projections and/or reports; (c) he or she enjoyed significant personal contact and familiarity with
the other defendants and was advised of or had access to other members of the Company’s
management team, internal reports and other data and information about the Company’s business
finances and operations at all relevant times; and (d) he or she was aware of the Company’s
dissemination of information to the investing public, which he or she knew or recklessly disregarded,
was materially false and misleading.
155. Defendants had actual knowledge of the misrepresentations and omissions of material
facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and
to disclose such facts, even though such facts were readily available to them. Defendants’ material
misrepresentations and/or omissions were made knowingly or recklessly and for the purpose and
effect of concealing Limited Brands’ operating condition and future business prospects from the
investing public and supporting the artificially inflated price of its common stock. If defendants did
not have actual knowledge of the misrepresentations and omissions alleged, they were at the very
- 55 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 57 of 62 PAGEID #: 287
least reckless in failing to obtain such knowledge by deliberately refraining from taking those steps
necessary to discover whether those statements were false or misleading.
156. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Limited Brands’
securities was artificially inflated during the Class Period. In ignorance of the fact that the market
prices of Limited Brands’ securities were artificially inflated, and relying directly or indirectly on the
false and misleading statements made by defendants or upon the integrity of the market in which the
securities trade, and/or in the absence of material adverse information that was known to or
recklessly disregarded by defendants, but not disclosed in public statements by defendants during the
Class Period, plaintiff and the other members of the Class acquired Limited Brands securities during
the Class Period at artificially inflated prices based on their reliance.
157. As alleged herein, the market prices of Limited Brands’ securities declined materially
when the truth concerning Limited Brands’ financial prospects and business, which had been
concealed by defendants’ material misrepresentations and omissions, was disclosed, causing plaintiff
and the other members of the Class substantial damages.
158. At the times, defendants disseminated the misrepresentations and omissions
complained of herein, plaintiff and other members of the Class were ignorant of their falsity, and
believed them to be true. Had plaintiff and the other members of the Class and the marketplace
known of the true financial condition and business prospects of Limited Brands, which were not
disclosed by defendants, plaintiff and other members of the Class would not have purchased or
otherwise acquired their Limited Brands’ shares, or, if they had acquired such shares during the
Class Period, they would not have purchased them at the artificially inflated prices which they paid.
159. By virtue of the forgoing, defendants have violated § 1 0(b) of the Exchange Act and
Rule 1 0b-5 promulgated thereunder.
- 56 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 58 of 62 PAGEID #: 288
COUNT II
For Violation of §20(a) of the Exchange Act Against All Defendants
160. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein. This claim is asserted against all defendants.
161. The Individual Defendants were and acted as controlling persons of Limited Brands
within the meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions with Limited Brands, their ownership and contractual rights, their participation in and/or
awareness of the Company’s operations, and/or their intimate knowledge of the Company’s actual
performance and undisclosed problems, the Individual Defendants had the power to influence and
control and did influence and control, directly or indirectly, the decision-making of the Company,
including the content and dissemination of the various statements which plaintiff contends are false
and misleading. The Individual Defendants were provided with, or had unlimited access to, copies
of the Company’s reports, press releases, public filings and other statements alleged by plaintiff to be
misleading prior to and/or shortly after these statements were issued and had the ability to prevent
the issuance of the statements or cause the statements to be corrected.
162. In particular, each of the Individual Defendants had direct and supervisory
involvement in the day-to-day operations of the Company and, therefore, is presumed to have had
the power to control or influence the particular transactions giving rise to the securities violations as
alleged herein, and exercised same. In addition, defendant Wexner owned 12.8% of Limited
Brands’ common stock and controlled the Company through his substantial stock ownership.
163. Limited Brands controlled the Individual Defendants and all of its employees.
164. As set forth above, Limited Brands and the Individual Defendants violated § 10(b) and
Rule 1 0b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as
controlling persons, defendants are liable to plaintiff and the other members of the Class pursuant to - 57 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 59 of 62 PAGEID #: 289
§20(a). As a direct and proximate result of defendants’ wrongful conduct, plaintiff and other
members of the Class suffered damages in connection with their purchases of the Company’s
common stock during the Class Period.
PRAYER WHEREFORE, plaintiff, individually and on behalf of the Class, prays for judgment as
follows:
A. Determining that this action is a proper class action and certifying plaintiff as class
representative under Rule 23 of the Federal Rules of Civil Procedure;
B. Awarding compensatory damages in favor of plaintiff and the other members of the
Class against all defendants, jointly and severally for all damages sustained as a result of defendants’
wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees; and
D. Awarding such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED Plaintiff hereby demands a trial by jury on all issues so triable.
DATED: June 25, 2010 ROBBINS GELLER RUDMAN & DOWD LLP HENRY ROSEN
s/ HENRY ROSEN HENRY ROSEN
655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) E-mail: [email protected]
- 58 - 530233_1 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33 Filed: 06/25/10 Page: 60 of 62 PAGEID #: 290
ROBBINS GELLER RUDMAN & DOWD LLP SARAH R. HOLLOWAY 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) E-mail: [email protected]
Lead Counsel Plaintiff
MURRAY MURPHY MOUL + BASIL LLP JOSEPH F. MURRAY (0063373) GEOFFREY J. MOUL (0070663) BRIAN K. MURPHY (0070654) 326 S. High Street, Suite 400 Columbus, OH 43215 Telephone: 614/488-0400 614/488-0401 (fax) E-mail: [email protected]
Liaison Counsel
- 59 - 530233_1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 61 of 62 PAGEID #: 291
CERTIFICATE OF SERVICE
I hereby certify that on June 25, 2010, I electronically filed the foregoing with the Clerk of
the Court using the CM/ECF system which will send notification of such filing to the e-mail
addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have
mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF
participants indicated on the attached Manual Notice List.
I certify under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct. Executed on June 25, 2010.
s/ HENRY ROSEN HENRY ROSEN
ROBBINS GELLER RUDMAN & DOWD LLP 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 Telephone: 619/231-1058 619/231-7423 (fax)
E-mail:[email protected]
530233_1 CM/ECF LIVE - U.S. District Court:OHSD- Page 1 of 1 Case: 2:09-cv-01008-EAS -MRA Doc #: 33 Filed: 06/25/10 Page: 62 of 62 PAGEID #: 292
Mailing Information for a Case 2:09-cv-01008-EAS -MRA
Electronic Mail Notice List
The following are those who are currently on the list to receive e-mail notices for this case.
• Deborah Clark-Weintraub [email protected]
• Charles S Duggan [email protected]
• Dennis E Glazer [email protected]
• Sarah R Holloway [email protected] ,[email protected]
• Thomas S Kilbane [email protected]
• Elisha J Kobre [email protected]
• Geoffrey J Moul [email protected],[email protected] ,[email protected]
• Brian K Murphy [email protected],[email protected]
• Joseph F Murray [email protected],[email protected]
• Joseph P Rodgers [email protected]
• Henry Rosen [email protected],[email protected]
• David Avi Rosenfeld [email protected]
• Samuel H Rudman [email protected]
• Patrick J Sheehan [email protected]
• Keith Shumate [email protected] ,[email protected],[email protected],[email protected]
• Joseph C Weinstein [email protected] ,[email protected] ,[email protected] ,[email protected] ,[email protected] ,[email protected] ,[email protected]
• Joe R Whatley , Jr [email protected] ,[email protected]
Manual Notice List
The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.
• (No manual recipients)
https://ecf.ohsd.uscourts.gov/cgi-bin/MailList.pl?333422802186016-L_65_0-1 6/25/2010 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 1 of 44 PAGEID #: 293
EXHIBIT A Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 2 of 44 PAGEID #: 294 Case 0910246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PVkJ 4JOR DI, C.USSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS
GENERAL CATALYST GROUP IV, L.P. and GENERAL CATALYST ENTREPRENEURS FUND IV, L.P.,
Plaintiffs,
against -
LIMITED BRANDS, INC., VICTORIA'S Civ. Act. No. SECRET DIRECT, LLC, MARTYN REDGRAVE, TIMOTHY J. FABER, SHAREN JESTER TURNEY and LESLIE H. WEXNER,
Defendants.
COMPLAINT
General Catalyst Group IV, L.P. and General Catalyst Entrepreneurs Fund IV, L.P.
(together, "General Catalyst") bring this Complaint for fraud, breach of fiduciary duty, and other
statutory and common law causes of action. General Catalyst demands damages in an amount to
be proven at trial in excess of $84 million.
PRELIMINARY STATEMENT
1. "You are us and we are you." That was the refrain used by defendant
Martyn Redgrave, the number two executive at Ohio-based, retail behemoth Limited
Brands, Inc. ("Limited Brands') to assert the defendants' total domination and control of
n2N Commerce, Inc. ("n2N"), a Cambridge-based start-up company formed to develop a
software platform to facilitate internet-based retail sales transactions and to market that
generic platform to major retailers around the world. Defendants had induced plaintiff Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 3 of 44 PAGEID #: 295 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 1429:19 Desc Exhibit C Pffll ;^ORg DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
General Catalyst to invest almost $20 million at the formation of n2N. Yet Redgrave and
other defendants used their domination and control of n2N to sacrifice the young
company for their own benefit, thus destroying the value of General Catalyst's
investments, even as defendants concocted their plan with purported misrepresentations
of their commitment to the success of n2N. Defendants used these misrepresentations to
induce additional debt investments of more than $8 million by General Catalyst and to
induce General Catalyst to acquiesce to demands by defendants that took n2N off track
and led to defendants' willful destruction of the company.
2. Although General Catalyst did not know it at the time, a Limited Brands
employee told an n2N employee that, as early as the summer of 2007, high-level
executives within Limited Brands wanted to "shut down" n2N. Further, although
defendants later professed that they abandoned n2N because the young company
subsequently failed to develop and deliver the generic software platform that Limited
Brands expected, it was defendants, in fact, who dominated and controlled n2N at all
times, and defendants Redgrave and Sharen Turney even admitted that it was Limited
Brands and Limited Brands' subsidiary, Victoria's Secret Direct, that had derailed the
development project.
3. On information and belief, defendants perpetrated their scheme of deceit
and deception because:
(a) Post-Enron accounting rules prevented defendant Limited Brands from
using n2N as part of an accounting scheme to understate Limited Brands' expenses, as
Limited Brands planned to do.
2 i Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 4 of 44 PAGEID #: 296 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit
C Pg9kA* OR DISCUSSIONPURPOSES ONLY 3 INADMISSIBLE SETTLEMENT COMMUNICATION i (b) Business conditions at Limited Brands led defendants to turn their back on
the n2N development project.
(c) Defendants wanted to shield Limited Brands' wholly-owned subsidiary,
L.B.Z. Holdings, Inc. ("LBI"), from certain contractual liabilities to General Catalyst.
These included liability under a Put Option that entitled General Catalyst to require LBI
to purchase General Catalyst's shares in n2N at an agreed price.
4. Upon information and belief, after forcing n2N to fold, Limited Brands
now plans to enrich itself with the fruit of n2N's work by employing former n2N
employees, retaining n2N sub-contractors, and even may be planning to bid for n2N's
assets at a fire-sale auction that defendants caused.
5. The return that General Catalyst would have received on its $28 million in
equity and debt investments had Limited Brands not scuttled the investment for its own
selfish reasons is in the hundreds of millions of dollars.
SUMMARY OF ALLEGATIONS
6. n2N was founded in June 2006 to develop an innovative technology
platform to revolutionize web-based, direct-to-consumer sales. n2N was to deliver the
platform first to Limited Brands' subsidiary, Victoria's Secret Direct ("VSD"), and then
was to market the platform to other retailers who, like VSD, annually sold billions of
dollars of merchandise on the internet and through other direct to consumer channels.
n2N's objective was to build itself into a vital, independent platform vendor using its
relationship with Limited Brands and VSD to catapult itself into a leading position in
large-scale e-commerce software and services.
3 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 5 of 44 PAGEID #: 297 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C P 'c' 1 AOR DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
7. In the Spring of 2006, principals at Limited Brands convinced General i Catalyst to become the only other major shareholder with Limited Brands in n2N.
General Catalyst is a Cambridge-based venture capital company which has as a
substantial percentage of its investors educational and other not-for-profit organizations.
Limited Brands represented that it conceived of n2N as a stand-alone company that
would partner with VSD to develop the technology platform. Martyn Redgrave and
others at Limited Brands represented that Limited Brands and VSD had already spent
millions of dollars in failed attempts with Amazon.com, GSI Commerce, and other
companies—as well as attempts at internal development—to enhance VSD's direct-to-
consumer capabilities. They represented that they had concluded that they had no choice
but to proceed with creating an independent company that would build an innovative
platform.
8. Limited Brands induced General Catalyst to invest $27.8 million in n2N—
$19.8 million as an initial equity investment and an additional $8 million in the summer
and fall of 2007 in the form of bridge loans. General Catalyst made these investments
after repeated assurances by Martyn Redgrave, Sharen Turney and other high-level
individuals in Limited Brands and VSD that n2N would remain a stand-alone entity and
that Limited Brands was committed to---and indeed, had no alternative but to proceed
with—n2N's platform development project.
9. As it turned out, however, defendants were not committed to the success
of n2N, but only to what they could squeeze out for themselves from the company and
the capital provided by General Catalyst, and defendants were at all times willing to, and
ultimately did, sacrifice n2N for their own benefit. For example, upon information and
4 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 6 of 44 PAGEID #: 298 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C P ' 014APOR DLSCUSSIONPURPOSES ONLY INADMISSIBLE SET'T'LEMENT COMMUNICATION i belief, Limited Brands conceived of n2N as a stand-alone entity as part of an Enron-like
accounting ploy in which its operating income would be spared the expenses associated
with n2N's software development efforts. When Limited Brands realized that post-Enron
accounting rules prohibited such chicanery, this original benefit vanished, and Limited
Brands could no longer use n2N to disguise development costs. At that point, n2N lost
its value to Limited Brands as an accounting ploy.
10. Defendants nonetheless continued to assure General Catalyst that
defendants' commitment to n2N was unwavering. Relying on these assurances, during
the summer and fall of 2007, and because delays and additional work at n2N demanded
by Limited Brands and VSD required additional funding at n2N, General Catalyst
provided bridge loans to n2N totaling $8 million. At the time it did so, defendants knew
but failed to disclose to General Catalyst that they were about to scuttle n2N because of
developments within Limited Brands and VSD.
11. Moreover, since shortly after the launch of n2N, Limited Brands and VSD
had inundated n2N with changes and modifications to the software that hampered and
- --- delayed n2N's progress. At a meeting in September 2007 among senior executives from
Limited Brands, VSD, n2N and General Catalyst, Martyn Redgrave and Sharen Turney
acknowledged that, by making such demands, Limited Brands and VSD had in fact
derailed n2N from its original plan. Sharen TI urney put on a show of loudly berating the
VSD executive at the meeting responsible for the n2N partnership for "completely
mishandling" the project. Defendants assured representatives of General Catalyst that
defendants, nonetheless, remained committed to the long-tenn success of n2N. General
5 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 7 of 44 PAGEID #: 299 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PVRJ* ftOR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Catalyst's representatives also offered to provide additional funding to n2N based on
assurances that their initial investment was being protected.
12. Two months later, however, in November 2007, Limited Brands told
General Catalyst that it was seriously considering taking the entire n2N platform
development project in-house, but, if it did, it would ensure that Limited Brands'
subsidiary, LB1, purchased General Catalyst's shares in n2N at a previously agreed price.
A month after that, in December 2007, Limited Brands suddenly announced that neither
it nor VSD would continue to support n2N. Without VSD as its first customer, n2N was
forced to terminate all of its approximately 80 employees and to close operations on
December 18, 2007.
13. Limited Brands and VSD's professed reason for abandoning n2N was that
n2N failed to deliver what was required. This was despite Redgrave's and Turney's
admissions that Limited Brands and VSD had derailed the project and despite, too, that
events having nothing to do with n2N, including post-Enron accounting requirements,
actually motivated Limited Brands to forsake n2N. In fact, unbeknownst to General
Catalyst at the time, in the summer of 2007, a Limited Brands employee told an n2N
employee that high-level executives within Limited Brands wanted to "shut down" n2N.
14. Further, despite their willingness to publicly cast blame on n2N and its
employees, Limited Brands and VSD acted as if n2N was achieving its purpose. VSD
had down-loaded to n2N reams of personal information regarding VSD customers--a
step that was not originally scheduled to be taken until n2N's platform had been
substantially completed and would never be taken by any responsible company if Limited
Brands actually believed its public claims regarding n2N's failure. Even further, if
6 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 8 of 44 PAGEID #: 300 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23109 14:29:19 Desc Exhibit C P 90AMOR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Limited Brands were correct that n2N delivered software that did not initially comply
with requirements, Limited Brands simply ignored the contractual "cure" provisions that
were specifically designed to protect General Catalyst against attempts by Limited
Brands to unilaterally deny General Catalyst its investment.
15. Upon information and belief, after forcing n2N to fold, Limited Brands
now plans to enrich itself with the fruit of n2N's work by employing former n2N
employees, retaining n2N sub-contractors, and even may be planning to bid for n2N's
assets at a fire-sale auction Limited Brands itself caused.
16. At the end of the day, Limited Brands left General Catalyst with nothing,
save for a mounting heap of negative publicity in its home Massachusetts market after
Limited Brands skulked back to Ohio. At a minimum, General Catalyst is entitled to
payment by Limited Brands of $19.8 million and is also entitled to recover the $8
million that Martyn Redgrave and others at Limited Brands defrauded it into loaning n2N
in the summer and fall of 2007. Finally, the return that General Catalyst would have
received on its $28 million had Limited Brands not scuttled the investment for its own
selfish reasons is in the hundreds of millions of dollars.
PARTIES
17. General Catalyst Group IV, L.P. is a limited partnership organized and
existing under Delaware law. It conducts business within Massachusetts and has offices
in Cambridge, Massachusetts.
18. General Catalyst Entrepreneurs Fund IV, L.P. is a limited partnership
organized and existing under Delaware law. It conducts business within Massachusetts
and has offices in Cambridge, Massachusetts. (General Catalyst Group IV, L.P. and
7 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 9 of 44 PAGEID #: 301 Case 09-10246 Doe 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa,90AAAOR DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION l General Catalyst Entrepreneurs Fund IV, L.P. are hereafter referred to as "General i Catalyst" ). A substantial percentage of General Catalyst's investors are educational and
other not-for-profit institutions.
19. General Catalyst owns 60.42% of the voting stock in n2N and, prior to
---- January 7; 2008a had-two designees, Larry-Bohn ("Bohn") and Joel Cutler ("Cutler"), on
the n2N Board of Directors.
20. Limited Brands, Inc. ("Limited Brands") is a Delaware corporation
headquartered in Columbus, Ohio. Limited Brands operates more than 2,900 specialty
stores around the world, including Victoria's Secret, Bath & Body Works, Express,
Limited Stores, and other retail brands. In 2006, Limited Brands' net sales were $10.7
billion. Through its wholly-owned subsidiary, L.B.I. Holdings, Inc. ("LBI"), Limited
Brands owns 39.48% of the voting stock of n2N.
21. Victoria's Secret Direct, LLC ("VSD") is a wholly owned subsidiary of
Limited Brands. VSD is the direct sales arm of Victoria's Secret and specializes in
direct-to-consumer sales (;that is, sales that originate through catalogues or via the
internet). In 2006, VSD's net sales were $1.4 billion and, by 2007, fueled by VSD's
market presence, Victoria's Secret had become Limited Brand's flagship enterprise.
22. Martyn Redgrave ("Redgrave") resides in Edina, Minnesota. Redgrave is
the Chief Administrative Officer at Limited Brands, reporting directly to Leslie H.
Wexner, Limited Brands' Chairman and Chief Executive Officer. Before January 7,
2008, Redgrave was one of two director designees by Limited Brands on n2N's board of
directors.
8 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 10 of 44 PAGEID #: 302 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa# 7R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
23. Timothy J. Faber ("Faber") resides in New Albany, Ohio. At all times
relevant to the allegations in the Complaint, Faber was the Senior Vice President of
Mergers & Acquisitions at Limited Brands.
24. Sharen Jester Turney ("Turney") resides in New Albany, Ohio. From
May 2000 until July 2006, Turney was the Chief Executive Officer at VSD. In July
2006, Turney was promoted to Chief Executive Officer and President of Victoria's Secret
Megabrand and Intimate Apparel, of which VSD is a division. Before January 7, 2008,
Turney was also, with Redgrave, one of the two director designees by Limited Brands on
n2N's board of directors.
25. Leslie H. Wexner resides in New Albany, Ohio. At all times relevant to
the allegations of this Complaint, Wexner was the Chief Executive Officer and Chairman
of the Board of Limited Brands.
JURISDICTION
26. This Court has jurisdiction (a) under 28 U.S.C. §§1331 and 1337, and 15
U.S.C. § 78aa, because plaintiffs allege claims under Section 10 of the Exchange Act and
Regulation IOb-5 promulgated thereunder, and under Section 20(a) of the Exchange Act;
and (b) under 28 U.S.C. § 1367 with respect to this Court's supplemental jurisdiction
over state law claims.
27. This Court has personal jurisdiction over each defendant because each
defendant has (a) transacted business in the Commonwealth of Massachusetts, (b)
contracted to supply services or things in the Commonwealth of Massachusetts, (c)
caused tortious injury by acts or omissions in the Commonwealth of Massachusetts,
and/or (d) caused tortuous injury in the Commonwealth of Massachusetts by acts or
9 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 11 of 44 PAGEID #: 303 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Dese Exhibit C Pa 1 f.%R DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
omissions outside of the Commonwealth of Massachusetts, while regularly doing or
soliciting business, or deriving substantial revenue from goods used or consumed or
services rendered, in the Commonwealth of Massachusetts. Further, the claims described
herein are related to each defendant's purposeful contacts with the Commonwealth of
Massachusetts and the exercise of jurisdiction over each of the defendants is reasonable
under the circumstances.
VENUE
28. Venue is proper in this District pursuant to (a) 28 U.S.C. § 1391(b)(2)
because a substantial part of the events or omissions giving rise to the claims occurred in
this District, and (b) IS U.S.C. § 78aa because many of the acts or transactions giving rise
to claims under Sections 10 and 20(a) of the Exchange Act occurred in this District.
FACTUAL BACKGROUND
Defendants Induced General Catalyst to Invest in n2N With Assurances That Defendants Would Support n2N as a Stand-Alone Business.
29. In or about the Spring of 2006, General Catalyst's Larry Bohn and Joel
Cutler met in New York City with Redgrave, Faber, Turney, Len Schlesinger
("Schlesinger"), the then President and Chief Operating Officer of Limited Brands, and
Ruben Pinchanski, the then Executive Vice President of Limited Brands Direct. At that
meeting, Redgrave, Turney, Faber and Schlesinger described Limited Brands' and VSD's
need to move away from their antiquated mainframe-based IT platform. As they
described it, Limited Brands and VSD had been forced to rely on an internally created
system operating on a mainframe that VSD's burgeoning business had outgrown. Unless
10 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 12 of 44 PAGEID #: 304 Case 09-10246 Doc 34-3 Filed 02/23109 Entered 02/23/09 14:29:19 Desc Exhibit C Paft^# *'OR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
an alternative platform was created, the growth of VSD and Victoria's Secret, which was
becoming Limited Brands' flagship enterprise, would be jeopardized.
30. Also at the meeting, Turney, Faber, Redgrave and Schlesinger explained
that Limited Brands was not interested in building the technology it needed in-house and i
that no suitable product was available in the marketplace. They explained that Limited
Brands had already spent millions of dollars in failed attempts with other companies,
such as Amazon.com and GSI Commerce, in trying to enhance Limited Brands' and
VSD's direct-to-consumer capabilities. They also said they had wasted many months and
additional millions of dollars trying internally to develop a platforill.
31. They described their plan of forging a stand-alone software company that,
partnering with VSD, would create an innovative platform that would power not only
VSD's web-based sales but would also, in a later phase of the company's operations, be
marketed to other mega-retailers. They explained that, given Limited Brands' and VSD's
failed efforts in the past, and given VSD's inadequate mainframe platform, the companies
had no choice but to proceed with the launch of this new company. They also said that
migrating VSD off of its outdated mainframe system was part of a larger IT initiative at
Limited Brands—which they referred to as the "Insight' project—to upgrade and e modernize their IT and distribution systems.
31 The defendants and defendants' representatives at this meeting were
determined to persuade General Catalyst of their sincere commitment to forming,
supporting, and operating n2N as a profitable, independent business with a broad
customer base. Toward this end, they represented to General Catalyst that the need of
Limited Brands and VSD for a suitable Internet sales platform was so dire, and that the
11 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 13 of 44 PAGEID #: 305 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14.29:19 Desc Exhibit C Pam `IOR DISCUSSION pU"OSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
companies had already lost so much money and time on previous development efforts,
that they had "no choice" but to proceed in the manner that they were proposing to
General Catalyst. i 33. At this and later meetings, Redgrave, Turney, Faber and Schlesinger
induced General Catalyst to become a shareholder and investor in their planned company.
They also explained that, because General Catalyst was a well-known investment firm i that invested primarily in technology companies, General Catalyst's involvement in the
project might also attract later stage investors. Further, because General Catalyst had
investments in other technology companies, they believed that General Catalyst might
encourage these other companies to work with their new start-up company and to provide
valuable sub-contracting services. They explained that given the amount of time and
money Limited Brands had spent in connection with their earlier failed attempts at
development, they wanted to speed up the build process by having best-of-breed
companies to either construct or license already constructed components of the platform
as vendors for their new company. They identified certain companies they knew General
Catalyst had a minority investment in as desirable and hoped General Catalyst could use
that influence to assist Limited Brands and VSD in attracting these companies.
Defendants Induced General Catalyst to Allow Defendants to Dominate and Control n2N.
34. During the parties' negotiations concerning the formation of n2N,
defendants Redgrave, Faber, and Turney, along with Schlesinger, represented that
defendant Limited Brands' subsidiary, defendant VSD, as a retailer typical of other
prospective customers for the Internet sales platform that n2N would develop, could
make a substantial contribution to n2N's platform development project. Defendants
12 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 14 of 44 PAGEID #: 306 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaV # VOR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
represented that VSD would, among other things, provide n2N with critical design
specifications, documentation, and other development support. Defendants thus
represented that they would contribute to the success of n2N by undertaking the
development project as a "joint venture" between, on the one hand, VSD and Limited
Brands, a $10 billion-a-year operation with a vast and sophisticated IT department and
many purported software experts, and, on the other hand, the new company, n2N.
Defendant Redgrave, in particular, repeatedly described the proposed development
project as a "joint venture" between these entities.
35. Accordingly, in the weeks and months that followed, Bohn and Cutler, on
behalf of General Catalyst, had numerous conversations and meetings with Redgrave,
Faber, Turney and Schlesinger about the proposed venture. During these conversations
and meetings, the venture took shape into what was to become n2N Commerce, Inc., or
n2N.
36. Defendants also represented that they would contribute to the success of
n2N by installing Limited Brands employees in key positions as founders and leaders at
the new company. They represented that this would enhance the development "joint
venture" because n2N would be relying heavily on VSD for design specifications and
other critical functions, and also because n2N would be working closely with Limited
Brands and VSD personnel throughout the development process. Thus, Ruben
Pinehanski ("Pinchanski"), who was at the time Executive Vice President of Limited
Brands Direct, which was Limited Brands' own direct-to-consumer division, became
n2N's Chief Executive Officer and one of its five directors. Steven Asbaty ("Asbaty"),
Vice President of Internet Sales at Limited Brands Direct, became n2N's Chief
13 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 15 of 44 PAGEID #: 307 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa 1 f. OR DISCUSSIONPURPO,S`ES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Partnership Officer. Pinchanski and Asbaty had earlier successfully led an effort to
develop a direct-to-consumer software platform for Limited Brands' Bath & Body Works
stores. Also, Wendy Lahaye, who had at one time led Limited Brands' direct-to-
consumer eCommerce strategy and development, became n2N's Chief R&D and
Innovation Officer. Mark Delcher, a former Director of Technology at VSD, became
n2N's Vice President of Technology Integration.
37. Based on defendants' representations concerning the "joint venture'
relationship between n2N, Limited Brands and VSD, defendants persuaded General
Catalyst to permit Limited Brands and VSD to evaluate and negotiate with key vendors
who contracted with n2N. Indeed, on numerous occasions, representatives of Limited
Brands and VSD directly assured n2N's vendors, in words or substance, that they "should
treat n2N as if it were Limited Brands because we will not let it fail."
38. Defendants' representations concerning the benefits that n2N would obtain
from this joint venture relationship, thus induced General Catalyst to submit n2N to the
domination and control of defendants. In sum, while inducing General Catalyst to
provide 65% of the equity financing for n2N, defendants also induced General Catalyst to
(a) accept just two seats on n2N's five-member Board of Directors, with Limited Brands
appointing two of the other three directors (defendants Redgrave and Turney) and
Pincahnski, the Executive Vice President of Limited Brands Direct before joining n2N,
serving as the fifth director and CEO; (b) make n2N dependant upon Limited Brands and
VSD for design specifications and other critical inputs into the platform development
project; (c) permit Limited Brands and VSD to install their own personnel in key
positions at n2N; and (d) agree that n2N would secure a second customer for its Internet
14 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 16 of 44 PAGEID #: 308 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ^-qjf MR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
sales platfonn only after it delivered the first platform to VSD, which would thus delay
and jeopardize 2N's efforts to enter the broader market, to which General Catalyst was
looking for its investment returns.
Defendants Complete Their Inducement of General Catalyst By Offering Kev Contract Provisions.
39. Defendants also induced General Catalyst to surrender domination and
control of n2N to Limited Brands and VSD by representing that they would cause
Limited Brands' subsidiary, LBI, to comply in good faith with certain contractual
protections critical for General Catalyst. General Catalyst, LBI, and n2N executed a
Stockholders Agreement and an Investment Agreement (the "Agreements"), both dated
as of November 22, 2006, and attached hereto as Exhibits A and B, respectively. The
Stockholders Agreement contained two provisions critical to the protection of General
Catalyst's interests in n2N.
40. First, the Stockholder's Agreement entitled General Catalyst to sell its
shares of n2N to LBI under certain circumstances. For example, once n2N had delivered
and obtained acceptance (or "Deemed Acceptance") of "Release 1"of the platform,
General Catalyst could require Limited Brands to purchase its stock for the original
aggregate purchase price (the "Put Option"). Exhibit A, at Section 2.4. This Put Option
was intended to protect General Catalyst in the event that Limited Brands or VSD
attempted to abandon n2N prematurely and, instead, proceed either with comparable
software development efforts in-house or with third-parties or attempted to discontinue
platform development efforts altogether.
41. Second, the Stockholders Agreement entitled General Catalyst to receive
an agreed price for its shares in the event that Limited Brands, through LBI, decided to I 15 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 17 of 44 PAGEID #: 309 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29.19 Desc Exhibit C Paft^7Igf %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
take over n2N. Exhibit A, at Section 2.3. Thus, LBI had the option of owning n2N free
and clear to do whatever it wanted with the company and with the intellectual property
assets n2N had developed. This was provided, of course, that Limited Brands paid
General Catalyst for its shares. Id. The purchase price of the called General Catalyst
shares was tied to General Catalyst's original investment or some high percentage
thereof, depending upon what triggered the call. Id.
42. Also important to General Catalyst were contractual provisions relating to
n2N's scheduled deliveries of software to VSD and n2N's "cure" rights. General
Catalyst recognized that, as with any agreement involving the development of complex
software, there would be inevitable delays and even temporary failures or missteps in the
development process. Thus, General Catalyst insisted upon--and received contractual
provisions that gave n2N the right to correct, or "cure," any deliveries that were not
initially successful. This was particularly important to General Catalyst because Limited
Brands and VSD were parties to the software development agreement (the "Development
Agreement") with n2N and were to have a say in whether a successful delivery had
occurred, Because General Catalyst was not a party to the Development Agreement, it
did not want Limited Brands or VSD to have the unilateral power to declare a non-
conforming delivery, and then be able to terminate the Development Agreement without
giving n2N the right to cure any deficiency. Thus, at various stages of the development
process, in the event n2N were to deliver software that was not initially deemed
acceptable, it had an opportunity—in some cases several opportunities—to "cure" any
deficiency and to re-deliver the software.
16 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 18 of 44 PAGEID #: 310 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ^ ` OR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
43. These rights were valuable to General Catalyst for a number of reasons.
VSD and Limited Brands, as part of the joint venture, were going to be working I shoulder-to-shoulder with n2N and would therefore have access to n2N's work product,
know-how and trade secrets, not to mention direct access to n2N employees and vendors. I These would be valuable assets and relationships that n2N would have developed
primarily with General Catalyst's capital. General Catalyst wanted air-tight mechanisms
so that Limited Brands and VSD, after having such access, would not turn their backs on
n2N and use those assets in connection with an internal design-and-build or in connection
with another development venture. This would have had General Catalyst paying
millions of dollars for Limited Brands' software development efforts without receiving a
single nickel in return.
44. The "put," "call," and "cure" rights were critical to General Catalyst for
several reasons. First, Limited Brands insisted on air-tight contractual assurances that
n2N would be prohibited from securing a second customer for its platform until after n2N
built the platform for VSD. While this was obviously an advantage to Limited Brands
and VSD, it deferred n2N's efforts to enter the broader market, where General Catalyst
saw its real returns coming from. Second, although General Catalyst was making the
lion's share of the investment in n2N $19.8 million as compared to Limited Brands'
$10.6 million—Limited Brands insisted that n2N's five-member board consist of
Redgrave, Turney and Pinchanski. Because Pinchanski had been a senior executive at
Limited Brands, General Catalyst saw itself being asked to surrender control of the board
to Limited Brands and VSD. This, of course, was not only the opposite of what was
17 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 19 of 44 PAGEID #: 311 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Past #. JOOR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
common—which is that the largest investor controls the board—but seriously
compromised General Catalyst's ability to protect its $19.8 million investment,
Defendants Misrepresented Their Commitment to n2N Even As They Set Out To Destrov The Comvanv. 45. Redgrave's and Tumey's public statements at the time of n2N's launch confirmed to General Catalyst that Limited Brands and VSD at least appeared to be
committed to n2N as a stand-alone entity. As Redgrave stated in January 2007, "we
believe n2N will reshape the retail industry. Having an independent technology provider
focused on the large, multi-channel retailer will allow our entire industry to rethink the
expensive and difficult path of building everything ourselves."
46. "We have concluded that there's no competitive advantage to owning and
operating a costly direct-to-consumer technical infrastructure," Turney stated at the time
of n2N's launch. "Sustainable advantage comes from excellence in merchandising,
marketing and service. Only n2N can address our requirements: n2N's breakthrough
solution will empower our merchants, marketers, technologists, and client service
associates to define and implement new business practices we only dream about today.
And since it's delivered on-demand as a service, we will drive down operating costs and
always have access to the latest technologies."
47. With General Catalyst's original investment at $19.8 million in n2N and
Limited Brands' investment at $10.6 million, the n2N launch was also touted in the
financial press as "one of the largest series A investments in a technology start-up in
years."
48. Despite Limited Brands' and VSD's initial laudatory statements of support
for n2N as a stand-alone business targeting a broad customer base, Limited Brands and
18 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 20 of 44 PAGEID #: 312 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ?^#.. ` OR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
VSD hobbled n2N just months into n2N's development project. Although defendants
represented that General Catalyst and n2N could rely on VSD's timely provision of
specifications and documentation regarding software design needs—in fact, VSD's
timely provision of such material was built into the Development Agreement—VSD
utterly failed in this regard. While assuring General Catalyst that n2N would benefit
from having VSD as its partner providing specifications and other crucial assistance for
the platform development project, significant portions of the functionality of VSD's
existing software, processes and performance criteria were completely undocumented.
These gaps in essential specifications, which were known by Limited Brands and VSD
before n2N's launch, frustrated n2N's design attempts and made n2N's work far more
expensive and time-consuming,
49. Further, defendants had concealed that large and critical components of
VSD's existing software—which n2N's software was intended in part to supplement—
simply did not exist and had to be built from scratch. For example, early in the process,
General Catalyst discovered that VSD did not have an adequate content management tool
suitable for the type of platform n2N was to construct. Such a tool organizes the content
to the web-based platform—the merchandise photographs, prices, sizes and related
marketing text—without which web-based selling would obviously be impossible. The
construction of this tool took many thousands of man-hours and increased the time and
expense of n2N's early development efforts.
50. In addition, rather than making its best efforts to address these previously
concealed problems after the launch of n2N, Limited Brands and VSD failed to retain the
sources of the core group of their employees that had been and were to continue to be the
19 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 21 of 44 PAGEID #: 313 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29;19 Desc Exhibit C Pa ?W *bR DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
day-to-day partners with n2N. As but a few examples, Donna Johnson, Vice President of
Web Operations at Limited Brands, Kate Bailey, Limited Brand's Head Web Merchant,
and Steve Cohn, another Vice President of Limited Brand's Web Operations, all left
Limited Brands at a critical early stage in n2N's development efforts. This core group of
people had been involved with n2N in designing the plans and specifications for the n2N
software and were to be instrumental in the joint venture going forward.
51. On top of all of this, almost from the outset, Limited Brands and VSD
insisted on features and functions of the planned software that were far beyond the scope
of the original plan, the Development Agreement, or the requirements for general
marketability of the platform, By June of 2007, n2N delivered to VSD a version of the
first release for the n2N platform, This was after n2N had completed numerous "sprints"
of the release. Under the work plan agreed to by n2N and VSD, a "sprint" reflects the
completion of either a segment or a draft of the release that is inspected and approved
before further work is to continue. Seven sprints were inspected by VSD; while one of
them the third—turned up issues that needed to be addressed, the other six were
approved and the four final sprints addressed all issues identified in the third.
52. But when n2N demonstrated the release for VSD and Limited Brands soon
after its June delivery, VSD and Limited Brands suddenly announced that the n2N
software required hundreds of additional, new functionalitics that had neither been
contemplated at the start of n2N nor set forth in the Development Agreement, and that
were tailored to specific needs of VSD and not to a generic platform that could be
marketed broadly. When n2N pointed out that these changes would add expense and
time to the project that were not part of the original deal, defendant Redgrave brushed
20 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 22 of 44 PAGEID #: 314 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ^-?f *?R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION 3 aside n2N's concerns as petty and formalistic. "You are us and we are you," Redgrave
said repeatedly, totally disregarding General Catalyst's interest in n2N and underscoring
defendants' control and domination of n2N and their intent to use that control and
domination to further their own ends, even at n2N's expense.
53. For General Cataayst's part, Bohn and Cutler informed Redgrave and
Turney that forcing n2N to design and build these new functionalities not only violated
the applicable agreements but would add thousands of hours to the project and cause
unanticipated expense. In or about June 2007, Redgrave and Faber assured Bohn and
Cutler that Limited Brands would address this issue, and discussed increasing fees to n2N
with respect to later development efforts, which would ultimately benefit General
Catalyst. Further, at a meeting of n2N's Board of Directors on July 18, 2007, Bohn asked
Schlesinger, then President, Vice Chairman and Chief Operating Officer of Limited
Brands, for assurance that n2N's operations would not be impacted by layoffs or any
other developments internal to Limited Brands. Bohn raised the issue because Limited
Brands had recently announced the sale of two of its divisions and Bohn was worried that
this might impact the n2N project. Schlesinger assured Bohn that the project would not
be affected and that Limited Brands had no alternatives other than to proceed with n2N.
He also said that, in his judgment, after reviewing developments at n2N, the n2N project
was on track, making good progress, and that there appeared to be nothing out-of-the-
ordinary about n2N's development efforts.
21 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 23 of 44 PAGEID #: 315 Case 09-10246 Doc 34-3 Filed 02123109 Entered 02/23/09 14:29:19 Desc Exhibit C Pam %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Defendants Falsely Assure General Catalyst Of Their Continued Commitment While Secretly Deciding To Dismantle n2N Because of Develouments At Limited Brands.
54. Initially unbeknownst to General Catalyst, beginning in the summer of
2007, Limited Brands' and VSD's behavior toward n2N was being driven by turmoil
within the Limited Brands organization. First, the inexplicable departures of Limited
Brands' web experts----those with whom n2N needed to work—proved only to be the
beginning of a deep shake-up in personnel at Limited Brands involved in the n2N project.
Further, during the Spring and Summer of 2007, the IT departments within Limited
Brands and VSD were in a state of chaos; so much so that the "Insight" project that
Redgrave, Turney and Schlesinger had described to General Catalyst during early
meetings—a project that required VSD to promptly migrate off of its old mainframe
system—was in tatters. During that same time, a much-touted one-million square foot
warehouse and distribution center that Limited Brands was developing—with which the
n2N software platform was intended to interact—was becoming a slow-motion train
wreck. This development, when finally announced by Limited Brands in November
2007, collapsed Limited Brands' earnings per share and threatened deep cuts in sales by
its flagship Victoria's Secret's division.
55. As to the continued departures of Limited Brands' personnel, they soon
reached the very top of the organization. On July 31, 2007, Limited Brands announced
the departure of Len Schlesinger, Limited Brands' former President, Chief Operating
Officer and Vice Chairman. Schlesinger had been part of the original team at Limited
Brands heading the n2N project. His departure was announced just two weeks after the
22
Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 24 of 44 PAGEID #: 316 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaVIAW.%RDISCUSSIONpUpPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
July 18, 2007 n2N board meeting in which Schlesinger assured Bohn and others that
Limited Brands remained committed to the n2N project.
55. Within one hour of the public announcement of Schlesinger's departure,
Redgrave and Faber telephoned Cutler at General Catalyst and assured him that, despite
the departure, Limited Brand's commitment to the n2N project was unwavering, and that
Limited Brands and VSD had no alternative but to proceed with the n2N project.
Redgrave and Faber made similar telephone calls to Cutler's partner, Bohn, and to
Pinchanski, n2N's CEO. Turney also called Pinchanski with similar assurances. Despite
Redgrave's and Turney's assurances, another critical departure followed on the heels of
Schlesinger's. Just weeks after Schlesingers' July 31 departure, Donna Ruch, VSD's
former Vice President and Head of Technology, was fired. Ruch was the senior-most
employee at VSD who was assigned to work on a daily basis with the n2N team. As it
turned out, Ruch was replaced by Rick Jackson, VSD's Chief Operating Officer. Jackson
was the person (General Catalyst was to learn later) who was responsible for what turned
out to be the failure of Limited Brands' automated distribution center.
57. In addition to the departures, the failure of Limited Brands' new
distribution center rocked Limited Brands to the core. According to Limited Brands, the
disruptions to the new distribution center would "materially impact [Limited Brands']
results of operations for the fourth quarter of 2007" and "could have a material adverse
effect on [Limited Brands'] results of operations beyond the fourth quarter of 2007."
Limited Brands, Inc. United States Securities and Exchange Commission Form 10-Q for
the quarterly period ended November 3, 2007 at 30.
23
Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 25 of 44 PAGEID #: 317 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Dese Exhibit C Paft^W- %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
58. So pervasive was the impact of this failure that Limited Brands blamed it
for a staggering 40% decline in VSD's third-quarter operating income, Limited Brands
reported that this decline was "primarily due to a decline at Victoria's Secret Direct" that
was driven by operational issues associated with [the] new distribution center, which
resulted in decreases in merchandise sales and shipping and handling revenue as well as
incremental labor costs to staff the new distribution center and remediate the operational
issues." Id at 18.
59, Limited Brands likewise disclosed months later that the distribution center
fiasco and other problems within Limited Brands had caused all of its technology
initiatives to come to a grinding halt, During a third quarter earnings call on November
20, 2007, Redgrave explained that, "As a result of the challenges that we've experienced
with both the implementation of the supply chain systems at Bath & Body Works and the
new direct distribution center, we are reevaluating the approach and timing of the supply
chain systems rollout to Victoria's Secret ... and the development of the new front end
technologies systems at Victoria's Secret Direct." As Redgrave said during the call: "We
are reevaluating the timing and approach to our ongoing technology initiatives in order to
minimize the disruptions to our business in 2008."
60. While Limited Brands' automated distribution center was collapsing,
Limited Brands was also realizing that the financial impact on Limited Brands of a stand-
alone n2N was vastly inferior to an internal design and build. program. Upon information
and belief, from the outset, Limited Brands anticipated that owning a minority interest in
a stand-alone software design company would be "off the income statement" because it
was financed by equity. During the fall of 2007, however, Faber told Bohn that Limited
24 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 26 of 44 PAGEID #: 318 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Paffl". %R DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Brands had discovered that Limited Brands' financing of n2N would no longer be
eligible for such treatment because of post-Enron accounting regulations that determine
the rules for consolidating the results of special purpose entities like n2N.
61. Throughout the summer of 2007, while the internal issues described above
rocked Limited Brands and VSD, n2N prepared to deliver Release 1 of the software
platform to VSD in early September of 2007. As this progressed, instead of revealing to
General Catalyst that they were reeling from events that could jeopardize their
involvement in the project, Limited Brands and VSD offered a steady drumbeat of
commitment and praise. As Turney said in an August 1, 2007 email to Pinchanski that
she knew or should have known would be circulated to General Catalyst: "In light of
recent announcements [regarding Schlesinger's departure], I wanted to take this
opportunity to assure you that we remain completely supportive of n2N. n2N has and
will always be viewed as a growth engine for the Limited Brands. We remain excited
about what the team has accomplished to date and look forward to a successful launch."
62. Soon thereafter, Redgrave reported to General Catalyst that he had had
conversations with Charles River Ventures ("CRV") regarding CRV's possible
participation in another round of financing of n2N. General Catalyst had introduced
CRV, as well as other potential investors, to Redgrave and the n2N project as potential
sources of additional equity funding for n2N. Redgrave reported that, in anticipation of
such an investment, CRV had had its software experts conduct due diligence on the n2N
platform being prepared for the September delivery of "Release 1." As Redgrave
reported in an August 18, 2007 email, "I had a chance to talk to Izhar Armony at CRV on
Friday. We had a great conversation that covered all aspects of their evaluation of n2N
25 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 27 of 44 PAGEID #: 319 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ?W %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
and their decision to offer to co-invest $10 million in equity in connection with our
second round funding of the JV [n2N `joint venture']. I did ask him to review with me
the due diligence assessment that they did on the n2N vision, strategy and technology
platform.... He indicated-that their assessment indicates that the platform being
developed is well architected for commercial use and should be reusable for other
customers."
63. Although Limited Brands and VSD had continued to impose new features
on the platform's design during the summer, n2N nonetheless delivered the then current
version of Release 1 to VSD in September 2007.
64. On September 18, 2007, Redgrave, Turney, Bohn, and Cutler met at
Limited Brands' headquarters in Ohio. Also attending this meeting were Stephen
Wietrecki, the Chief Financial Officer of n2N, and Rick Jackson, the Chief Operating
Officer of VSD. Jackson was also heading up the design and creation of Limited Brands'
distribution center, which Limited Brands would only later disclose was a disaster.
65. The purpose of the meeting was to chart the future of the n2N project: For
General Catalyst's part, it wanted assurances that Limited Brands and VSD continued to
be committed to n2N as a stand-alone entity. Bohn. and Cutler were concerned by,
among other things, Schlesinger's and Ruch's departures, the continued insistence by
Limited Brands and VSD for changes and enhancements to the n2N software, and by
partial revelations late in the summer that Limited Brands was experiencing some
difficulties with its distribution center. Bohn and Cutler wanted to discuss future
capitalization of n2N and the recognition and protection of General Catalyst's Put Option
rights. They were also concerned that Limited Brands' and VSD's numerous changes
26
Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 28 of 44 PAGEID #: 320 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14.29:19 Desc Exhibit C PaWkW. %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
and enhancements to the n2N platform were taking n2N away from its original business
plan. Bohn and Cutler attended the September 18 meeting prepared to propose additional
financing by General Catalyst provided Limited Brands agreed to honor General
Cataylst's Put Option.
65. Bohn and Cutler's concerns about Limited Brands attempts to take n2N
away from its original business plan were also fueled by the fact that, on September 10, a
draft internal memorandum prepared by Limited Brands regarding its "Direct To
Consumer" initiative—Limited Brands title for its internal IT initiative that included the
n2N project--(the "September 10 Memorandum") had found its way into the hands of
n2N, and then to Bohn and Cutler. The September 10 Memorandum, which stated that it
was the "8`h Draft for Review and Discussion," had clearly been circulating within
Limited Brands during at least part of the summer. It described "Limited Brands'
leadership" as believing that a "significant change in approach" was necessary because
"The current working relationship between Limited Brands and n2N is not efficient or
effective for delivering a solution that can be implemented in Limited Brands within an
acceptable time frame and budget." Bohn and Cutler considered whether the proposed
change in the "working relationship" signaled that Limited Brands might be
contemplating taking the project in-house or some other fundamental change.
67. Thus, even before the September 18 meeting, Bohn and Cutler telephoned
Redgrave and asked him to explain what was meant by the September 10 Memorandum.
Redgrave denied having reviewed the September 10 Memorandum and also denied that it
reflected his or Limited Brands' views. Redgrave repeated his denials at the September
18 meeting and brushed off the memorandum as an unfortunate choice of words that did
27 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 29 of 44 PAGEID #: 321 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pam# %R DISCUSSIONPURPOSES ONLY .INADMISSIBLE SETTLEMENT COMMUNICATION
not reflect his views or those of other decision makers at Limited Brands. Then, after
Bohn and Cutler had discussed their concerns and their proposal to finance n2N in the
future, Redgrave and Turney acknowledged that Limited Brands and VSD had in fact
altered n2N's focus from its original plan and had caused the n2N project to be larger and
more expensive than originally planned. Tuey then purported to launch into a tirade
directed at Jackson for "completely mishandling" the project with n2N and particularly
for failing to provide the necessary leadership for the joint venture.
68. When the purported tirade passed, Redgrave assured Bohn and Cutler that
Limited Brands was committed to assuring the success of n2N, and protecting all or
substantially all of General Catalyst's original investment, including honoring General
Catalyst's Put Option. Redgrave added that he would like to hire an independent
consultant—selected and paid for by Limited Brands--to evaluate the Release 1 delivery.
Redgrave emphasized that he wanted such an evaluation merely so that he could explain
to others within Limited Brands the value of the software that had been completed to
date.
69. Within weeks of the September 18 meeting---Twin Technologies, the
company Limited Brands and n2N had selected to conduct the evaluation—had finished
its work, On or about October 19, 2007, Wietrecki and Thomas Keiser, Limited Brands'
Chief Technology Officer, made a joint presentation of Twin Technologies' findings
during a telephonic meeting involving, among others, Redgrave, Tumey, Jackson, Bohn,
Cutler and Pinchanski. Also participating were Stuart Bergdorfer, Limited Brands' Chief
Financial Officer, Wendy Arlin, its Corporate Controller, William Matt, VSD's Chief
Financial Officer, and Michael Underhill, a Senior Operations Specialist from VSD.
28 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 30 of 44 PAGEID #: 322 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaMAWyf AR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Keiser and Wietrecki reported that, according to the Twin Technologies evaluation, the
n2N software was architecturally sound, consistent with industry standards, and was
appropriate for its stage of development. Keiser also emphasized that the project
appeared to be on track and that any delays were caused by additional functionalities
requested by VSD and Limited Brands. I 70. The favorable state of the n2N software as described by Twin
Technologies and by Wietrecki and Keiser was also echoed by defendant Turney in an
interview that appeared in the October 2007 edition of Apparel Magazine. In the
interview, Turney stated that she expected that the n2N system would allow Limited
Brands to double its direct sales business in the next five years. She emphasized that
"[o]verall, we're very excited about the implementation. It's going to add a lot of value
to our business. We're very dedicated to it. We've got a lot of people focused on it, and
I think it is going to set us up for growth for the future." Turhey also stated that testing
performed on the n2N system revealed "the normal glitches, but nothing major." Jordan
K. Speer, Victoria's Secret Prepares for Growth, Apparel, October 2007.
71. Limited Brands and VSD were apparently so confident in the performance
and security of the n2N platform that they took the extraordinary step of providing n2N
with VSD's actual customer data for use in testing. Had Limited Brands and VSD not
had such a high level of confidence in the n2N platform, turning over this confidential
information would have been both pointless and reckless.
72. Despite the positive appraisals of the n2N software, internal issues at
Limited Brands and VSD were continuing to force Redgrave, Faber, Turney and others at
their companies to turn away from the interests of n2N and of General Catalyst. Indeed,
29 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 31 of 44 PAGEID #: 323 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaNAW. %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Limited Brands had decided that the best course for Limited Brands and VSD was to
abandon n2N as a stand-alone company and to either proceed with n2N's work internally
or to shelve Limited Brands' software initiative until a more propitious time. This was
driven by the undisclosed internal fiascos within Limited Brands and VSD, including the
fact that the "Insight" project that had been described to General Catalyst during early
meetings—a project that included moving VSD off of its old mainframe system—was in
tatters.
73. It also included the hobbling of VSD's one-million square foot warehouse
and distribution center that Limited Brands was developing—with which the n2N
software platform was intended to interact. In other words, what General Catalyst did not
know until it was too late—and what defendants knew but concealed—was that the very
circumstances that they had told Bohn and Cutler necessitated the need for n2N,
including company-wide IT initiatives, an automated distribution center, and even the
accounting ploy, had vanished. In fact, unbeknownst to General Catalyst at the time, in
August of 2007, a Limited Brands employee told an n2N employee that high-level
executives within Limited Brands wanted to "shut down" n2N.
74. Thus, in November of 2007, just one month after the Twin Technologies'
review and Turney's glowing statements about n2N's software appeared in Apparel
magazine, Limited Brands told General Catalyst that it was seriously considering taking
the entire development project in-house. In General Catalyst's view, Limited Brands was
now obligated under the "call" provisions of the Stockholders' Agreement. Under those
.provisions, LBI had the option of owning n2N free and clear and doing whatever it
wanted with n2N and its assets provided General Catalyst got paid for its shares.
30 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 32 of 44 PAGEID #: 324 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaWkW AR DISCUSSIONPURPOSES ONLY f INADMISSIBLE SETTLEMENT COMMUNICATION
75. At a meeting among Bohn, Cutler, Redgrave and Faber in Columbus, Ohio i on or about November 25, 2007, Bohn and Cutler reiterated that—as Redgrave had
assured them on numerous occasions General Catalyst's original investment had to be
protected. Redgrave and Faber assured them that it would.
75. Less than month after that, in December 2007, Limited Brands suddenly
announced that neither it nor VSD would continue to support n2N. General Catalyst then
presented Limited Brands with the documentation necessary under the Stockholders
Agreement to receive payment under the Put Option but Limited Brands refused to pay.
Finally, on December 18, 2007, without VSD as its first and only customer, n2N was
forced to terminate all 77 of its employees and to close operations on December 31, 2007.
77. Limited Brands and VSD's professed reason for , abandoning n2N was that
n2N failed to deliver what was required. This was despite Redgrave's and Turney's
admissions that Limited Brands and VSD had derailed the project, despite the positive
review of n2N's software by Twin Technologies and despite, too, that events having
nothing to do with n2N--Limited Brands' distribution center fiasco and post-Enron
accounting requirements—actually motivated Limited Brands to destroy n2N. Limited
Brands' professed claim is also squarely at odds with Turney's statements in the October
Apparel magazine that testing performed on the n2N system revealed "the normal
glitches, but nothing major."
78. Further, despite their willingness to publicly cast blame on n2N and its
employees, Limited Brands and VSD acted as if n2N was achieving its purpose. In
addition to their repeated assurances that General Catalyst's investment in n2N would be
protected, VSD had down-loaded to n2N reams of personal information regarding
31 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 33 of 44 PAGEID #: 325 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaNAW. %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Victoria's Secret's customers—a step that was not scheduled to be taken until n2N's
platform had been substantially completed and would never be taken by any responsible
company if Limited Brands actually believed its public claims. Further, even if Limited
Brands were correct that n2N may have delivered software that did not comply with
certain specifications, Limited Brands and VSD were the causes—through endless
changes in requirements—of any such non-compliance. Finally, Limited Brands simply
ignored the "cure" provisions of the Development Agreement, which were specifically
designed to protect General Catalyst against attempts by Limited Brands to unilaterally
terminate the Development Agreement and to deny General Catalyst its investment.
79. Defendants' subsequent conduct has revealed their real motives.
Defendants were willing to publicly throw n2N and its employees under the bus because
it was unwilling to admit to its shareholders that ineptitude and internal chaos at Limited
Brands had caused it to abandon yet another promising project. Further, after forcing
n2N to fold, it plans to exploit the valuable know-how, work product and trade secrets to
which it had access—and which General Catalyst largely funded—as the joint venturer
with n2N. On information and belief, Limited Brands also plans to harvest additional
fruits of n2N's work by employing former n2N employees, soliciting n2N sub-
contractors, and may even bid for n2N's assets at a fire-sale auction Limited Brands itself
caused. In this manner, Limited Brands seeks to accomplish an outright theft of the
assets generated with General Catalyst's equity and debt investments.
80. In addition to General Catalyst's original investment, General Catalyst
also provided bridge loans to n2N on June 7, 2007 and September 14, 2007 totaling
$8,040,997. These loans were necessitated by delays and additional work caused by
32 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 34 of 44 PAGEID #: 326 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pam +7R DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Limited Brands' and VSD's demands for enhancements, changes and increased
functionalities. General Catalyst made these loans—which it was under no obligation to
do—relying on Redgrave's, Faber's and Limited Brands' assurances that Limited Brands
was committed to n2N as a stand-alone entity, that Limited Brands had no choice but to
proceed with the n2N project, and that General Catalyst's original investment would be
protected, At the time these statements were made, Redgrave, Faber, Turney and Limited
Brands knew or should have known but did not disclose to General Catalyst—that
Limited Brands and VSD, facing their own internal turmoil, were already planning to
abandon n2N as a stand-alone entity.
81. At the end of the day, Limited Brands left General Catalyst with nothing,
save for a mounting heap of negative publicity in its home Massachusetts market after
Limited Brands skulked back to Ohio. LBI refused to honor General Catalyst's Put
Option and defendants refused to protect General Catalyst's original investment despite
defendants' assurances that they would do so. General Catalyst is entitled to payment of
$19.8 million and is also entitled to recover the $8.1 million that defendants fraudulently
induced it into loaning n2N in the summer and fall of 2007. Finally, because General
Catalyst invested in the venture with the expectation that n2N would also market a
generic software platform, General Catalyst is entitled to the present value of that
expected revenue stream. Given the size of the on-line retail market, this amount is in
hundreds of millions of dollars.
COUNT (Fraud—Against Redgrave, Faber, Turney, Limited Brands and VSD)
82. General Catalyst here realleges paragraphs 1 through 81.
33 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 35 of 44 PAGEID #: 327 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23109 14:29:19 Desc Exhibit C PaMAW %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
83. Throughout the duration of the n2N project, defendants falsely stated to i General Catalyst that they intended to continue with the n2N project, that defendants had
no alternatives but to migrate VSD's software platform to the platform n2N was creating,
that defendants remained committed to n2N's success, that General Catalyst's investment
was protected and that defendants and LBI would honor General Catalyst's rights under
the Put Option. At the time these statements were made, defendants knew or should have
known that these statements were false and made these statements with the intention to
induce General Catalyst to rely on them.
84. Defendants knew or should have known that Limited Brands and VSD,
because of internal developments at those companies, were planning to abandon the n2N
project and to either proceed with an internal design-and-build or to continue using their
existing software system.
85. Relying on defendants' false statements and omissions, General Catalyst
(a) held its shares of n2N rather than compel LBI and Limited Brands to make an
immediate payment of $19.8 million in connection with the Put Option rights or to take
other actions to immediately secure its original investment, (b) permitted defendants to
dominate and control n2N and (c) provided n2N bridge loans in the form of promissory
notes totaling $8,040,997.65.
COUNT II (Mass. Gen. Laws Ch. 93A--Against Limited Brands and VSD)
86. General Catalyst here realleges paragraphs 1 through 85.
87. At all times relevant to the conduct alleged herein, Limited Brands and
VSD engaged in trade or commerce within the meaning of Massachusetts General Laws
c. 93A.
34 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 36 of 44 PAGEID #: 328 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Dese Exhibit C P aW*Y+-f VOR DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
88. Limited Brands' and VSD's conduct constitutes "unfair or deceptive acts
or practices" within the meaning of Massachusetts General Laws c. 93A § 2.
89. Limited Brands' and VSD's actions constitute a willful or knowing
violation of Massachusetts General Laws c. 93A.
90. General Catalyst's losses occurred in whole or in part in Massachusetts,
where the conduct occurred and where General Catalyst maintains its place of business.
COUNT 11I (Violation of Section 10(b) of the Exchange Act and Rule 10b-5 against Redgrave, Faber, Turney, Limited Brands and VSD)
91. General Catalyst here realleges paragraphs 1 through 90.
92, General Catalyst's bridge loans in the form of promissory notes to n2N are
"securities" as defined by 15 U.S.C. 78c(a)(10).
93. Throughout the duration of the n2N project, defendants falsely stated to
General Catalyst that defendants intended to continue with the n2N project, that
defendants had no alternatives but to migrate VSD's software platform to the platform
n2N was creating, that defendants remained committed to n2N's success, that General
Catalyst's investment was protected and that defendants and LBI would honor General
Catalyst's rights under the Put Option. At the time these statements were made,
defendants knew or should have known that these statements were false and made these
statements with the intention to induce General Catalyst to rely on them.
94. Defendants knew but failed to disclose that they were planning to abandon
the n2N project and to either proceed with an internal design-and-build or to continue
using their existing software system.
35 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 37 of 44 PAGEID #: 329 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14.29:19 Desc Exhibit C PaVAW. %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
95. Relying on defendants' false statements and omissions, General Catalyst
provided n2N bridge loans in the form of promissory notes totaling $8,040,997.65.
COUNT IV (Liability under Section 20(a) of the Exchange Act against Wexner)
96. General Catalyst here realleges paragraphs 1 through 95.
97. Section 20(a) of the Exchange Act Section 20(a), 15 U.S.C. § 78t(a),
provides that any person who, directly or indirectly, controls any person liable under any
provision of the Exchange Act, or of any rule or regulation issued under the Exchange
Act, shall also be liable jointly and severally with and to the same extent as the control
person is liable.
98. Wexner is the founder, Chairman and Chief Executive Officer of Limited
Brands. VSD is a wholly-owned subsidiary of Limited Brands. Wexner and his family
own nearly 13% of the stock in Limited Brands, which makes Wexner and his family the
second largest holder of Limited Brands stock. Redgrave, as Limited Brand's Chief
Administrative Officer, reports directly to Wexner. Wexner and Redgrave serve together
on the Limited Brands' Executive Committee. Turney also reports directly to Wexner.
Prior to his departure in July 2007, Schlesinger reported directly to Wexner.
99. Because of Wexner's position as CEO of Limited Brands, and by virtue of
Limited Brands' ownership of VSD, Wexner had the power to control VSD's corporate
actions, management and policies, and routinely exercised that power, As the direct
supervisor of Redgrave and Turney, Wexner had the power to control Redgrave's and
Tumey's actions and routinely exercised that power.
36 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 38 of 44 PAGEID #: 330 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa W?f *bR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
100. Wexner was also aware of and controlled the information that was being
disclosed or being omitted from disclosure regarding Limited Brands and VSD as it
related to n2N. In addition to directly supervising Redgrave and Turney, Wexner signed
Limited Brands' 10-Qs and 10-Ks. Further, given that Victoria's ,Secret, Inc. and VSD
are major revenue sources for Limited Brands, Wexner was regularly advised of the
internal developments at Limited Brands and VSD regarding the "Insight" program, the
distribution center, and the progress of n2N. At all times relevant to this Complaint,
Wexner was more involved even than usual in these matters in light of the fact that the
disaster regarding the distribution center—which was to interact with the n2N platform—
had caused a 40% decline in VSD's operating income in the third quarter of 2007 and
also impacted Limited Brands' earnings per share.
101. Because of his position of control and authority, and because of the
importance of the matters involving n2N, Wexner either should have known of or was
able to and did control the misstatements and omissions made by Limited Brands, VSD,
Redgrave, Faber and Turney in violation of Section 10(b) of the Exchange Act and Rule
I Ob-S, and had the power and authority to cause Limited Brands, VSD, Redgrave, Faber
and Turney to engage and/or to stop engaging in the wrongful conduct complained of
herein.
COUNT V {Violation of M.G.L. ch.110A Sec.410 against Redgrave, Faber, Turney, Limited Brands and VSD}
102. General Catalyst here realleges paragraphs 1 through 101.
103. General Catalyst's bridge loans in the form of promissory notes to n2N
constitute "securities" as defined by M,G.L. ch. 110A Sec. 401.
37 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 39 of 44 PAGEID #: 331 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C PaRA f .OR4 DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
104. Throughout the duration of the n2N project, defendants falsely stated to
General Catalyst that defendants intended to continue with the n2N project, that
defendants had no alternatives but to migrate VSD's software platform to the platform
n2N was creating, that defendants remained committed to n2N's success, that General
Catalyst's investment was protected and that defendants would honor General Catalyst's
rights under the Put Option. At the time these statements were made, defendants knew or
should have known that these statements were false and made these statements with the
intention to induce General Catalyst to rely on them.
t05. Redgrave, Faber, Turney, Limited Brands and VSD knew but failed to
disclose that defendants were planning to abandon the n2N project and to either proceed
with an internal design-and-build or to continue using their existing software system.
106. Relying on defendants' false statements and omissions, General Catalyst
provided n2N bridge loans in the form of promissory notes totaling $8,040,997.65.
COUNT VI (Negligent Misrepresentation Against Redgrave, Falser, Turney, Limited Brands and VSD)
107. General Catalyst here realleges paragraphs 1 through 106.
108. Throughout the duration of the n2N project, defendants falsely stated to
General Catalyst that defendants intended to continue with the n2N project, that Limited
Brands and VSD had no alternatives but to migrate VSD's software platform to the
platform n2N was creating, that defendants remained committed to n2N's success, that
General Catalyst's investment was protected and that defendants would honor General
Catalyst's rights under the Put Option. At the time these statements were made,
defendants knew or should have known that these statements were false.
38 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 40 of 44 PAGEID #: 332 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa ( . ftR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
109. Beginning in June of 2007, Redgrave, Faber, Turney, Limited Brands and
VSD knew but failed to disclose that defendats were planning to abandon the n2N project
and to either proceed with an internal design-and-build or to continue using their existing
software system.
110. Relying on defendants' false statements and omissions, General Catalyst
(a) held its shares of n2N rather than compel LBI and Limited Brands to make an
immediate payment of $19.8 million in connection with the Put Option rights or to take
other actions to immediately secure its original investment, (b) permitted defendants to
dominate and control n2N and (c) provided n2N bridge loans in the form of promissory
notes totaling $8,040,997.65.
COUNT VII (Promissory Estoppel—Against Redgrave, Faber and Limited Brands)
111. General Catalyst realleges paragraphs 1 through 110.
112. Under the terms of the Stockholders Agreement, General Catalyst's Put
Option rights had fully matured.
113. Despite apparent disruptions at Limited Brands and VSD, Redgrave, Faber
and Limited Brands assured General Catalyst that they would protect General Catalyst's
investment and honor General Catalyst's exercise of the Put Option due to General
Catalyst's contributions to n2N according to the specifications of Limited Brands and
VSD.
114. It was reasonable and foreseeable that General Catalyst would rely on
these promises, and General Catalyst in fact did rely on those promises by continuing to
contribute to n2N's development.
39 Case: 2:09-cv-0 1 008-EAS -M RA Doc #: 33-1 Filed: 06/25/10 Page: 41 of 44 PAGEID #: 333 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pa `'jR DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
115. Redgrave, Faber and Limited Brands refuse to honor their promises.
116. The promises made by Redgrave, Faber and Limited Brands should be
enforced.
COUNT VIII (Tortious Interference with Contract—Against Limited Brands)
117. General Catalyst here realleges paragraphs 1 through 116.
118. General Catalyst, LBI and n2N were parties to the Stockholders
Agreement.
119. Limited Brands was at all times relevant to the conduct alleged herein
aware of the existence of the Stockholders Agreement and intentionally and without
justification caused LBI to breach the Stockholders Agreement.
COUNT IX (Breach of Fiduciary Duties---Against Redgrave and Turney)
120. General Catalyst here realleges paragraphs 1 through 119.
121. At all relevant times, Redgrave and Turney served on the n2N board of
directors.
122. As n2N directors, Redgrave and Turney owed a strict fiduciary duty of
unremitting loyalty to n2N and to General Catalyst as an n2N stockholder, which
included a duty of candor.
123. Rather than act in the best interests of n2N and General Catalyst,
Redgrave and Turney acted in a manner that was detrimental to those interests and were
improperly motivated by Limited Brand's internal information technology, accounting,
personnel and financial issues to protect Limited Brand's interests rather than n2N's and
General Catalyst's, and also misrepresented and failed to disclose material information
40 i Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 42 of 44 PAGEID #: 334 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29;19 Desc Exhibit C Pam#, %R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
regarding Limited Brands' and VSD's commitment to, and continued involvement in
n2N.
124. Through the actions described above, Redgrave and Turney breached their
fiduciary duties to General Catalyst.
COUNT X (Conspiracy to Breach Fiduciary Duty—Against. Limited Brands and VSD)
125. General Catalyst here realleges paragraphs 1 through 124.
126. Limited Brands and VSD expressly and by their conduct agreed to engage
in breaches of fiduciary duties by Redgrave and Turney, as directors and/or provided
substantial assistance in connection with attempts and efforts to harm. General Catalyst.
127. Such collective activity and agreement through its coercive effect has
resulted in greater harm to General Catalyst than had Limited Brands, VSD, Turney or
Redgrave acted singly or alone.
COUNT XI (Aiding and Abetting Breach of Fiduciary Duty—Against Limited Brands and VSD)
128. General Catalyst here realleges paragraphs 1 through 127.
129. Limited Brands and VSD aided and abetted the breaches of fiduciary
duties by Redgrave and Turney, as directors, and/or provided substantial assistance in
connection with attempts and efforts to hann General Catalyst.
COUNT XII (Negligence--Against Limited Brands and VSD)
130. General Catalyst here realleges paragraphs 1 through 129.
131. Because the actions of Limited Brands and VSD in relation to n2N would
have an impact on General Catalyst's investment and its ability to exercise its Put Option,
41 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 43 of 44 PAGEID #: 335 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Paw) £ V?R DISCUSSION PURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
they owed General Catalyst a duty of reasonable care in their conduct and behavior
toward n2N.
132. ' Limited Brands and VSD were negligent with respect to their conduct and
behavior in relation to n2N, which caused damage to General Catalyst.
PRAYERS FOR RELIEF
WHEREFORE, General Catalyst respectfully requests that the Court:
(A) Enter a judgment in favor of General Catalyst against each of the
defendants;
(B) Award General Catalyst damages incurred and suffered as a result
of LBI's actions as alleged above in an amount in excess of $28 million, to be
proven at trial;
(C) Award General Catalyst treble damages under Mass. Gen. Laws
Ch, 93A;
(D) Award General Catalyst interest and reasonable costs and
attorneys' fees; and
(E) Award General Catalyst such other and further relief as the Court
deems just and proper.
42 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-1 Filed: 06/25/10 Page: 44 of 44 PAGEID #: 336 Case 09-10246 Doc 34-3 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit C Pam£ +10R DISCUSSIONPURPOSES ONLY INADMISSIBLE SETTLEMENT COMMUNICATION
Respectfully submitted,
GENERAL CATALYST GROUP IV, L.P. & GENERAL CATALYST ENTREPRENEURS FUND IV, L.P.
By their attorneys,
Anthony S. Fiotto (BBO #558089) Jennifer W. Fischesser (BBO #651480) GOODWIN PROCTER LLP Exchange Place Boston, MA 02109-2881 (617) 570-1000 E-Mail: [email protected] [email protected]
Of Counsel Martin Flumenbaum PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3191 E-Mail: [email protected]
Dated: February, 2008
43 Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 1 01 14 PAGEID #: 337
EXHIBIT B Case: 2:09-cv-01 008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 2 of 14 PAGED #: 338
I " OC 34-2 Filed 02/23/1:111ert t-titeett02/23/09alr4:29:13 61DeltiiisEexhibit • C-..; 1' 4j; - ace FM 617 342 6859 B P#AVVIT41 Pl www.eckertseamans corn NS Boston,NIA 02110
John G. Loughnane 617.342.6885 jloughnane®eckeoseamans.com
October 31, 2008 •
VIA FEDERAL EXPRESS
Gail Stem, Esquire Limited Brands, Inc. Three Limited Parkway Columbus, OH 43230
Re: N2N Commerce, Inc.
Dear Ms. Stem:
This firm represents Joseph F. Finn, Jr. (the "Assignee"), in his capacity as the Assignee for the Benefit of Creditors of N2N Commerce, Inc. ("N2N"), pursuant to that certain Assignment for the Benefit of Creditors Agreement dated as of January 4, 2008 (the "Assignment").
The Assignee has determined that claims exist against Martyn Redgrave and Sharen Tumey (collectively, "the Fiduciaries") arising from their wrongful acts and/or omissions while serving as a director and/or officer of N2N. As set forth more fully below, these wrongful acts and omissions include, but are not limited to, breaches of the fiduciary duties of loyalty and care owed to N2N. Because N2N was hopelessly insolvent throughout the summer and fall of 2007, the creditors of N2N (and not its stockholders) constituted the primary constituency for whom those fiduciary duties were to be performed during such period. This letter shall serve as a formal demand for payment to the Assignee by the Fiduciaries for the monetary damage their wrongful acts as directors and/or officers of N2N caused the company.
The following facts and circumstances give rise to this claim:
I. Background
In 2006, Victoria's Secret Direct, LLC ("VSD") owned and operated a costly and out-dated direct-to-consumer technical infrastructure for its e-commerce business. VSD's parent, Limited Brands Inc. ("LBI") and VSD decided to replace VSD's in-house e-commerce infrastructure with new technologyjoeVSD to interact with customers in real time through shopping behavioictriggered online andising displays and e-mail promotions. The new technology would provide an e-commerce storefront, a contact center, and order management applications, all managed by "cross-channel retail workbenches." LBI and VSD determined not to develop the platform in-house but rather to have it developed by a new venture that would be funded by both LBI and a venture capital sponsor.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY (1(0380481.1} Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Pagel 3 of 14 PAGEID #: 339 • Ca 46 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit • MANS B Page 3 of 14
Gail Stem, Esquire October 31, 2008 Page 2
a. June 12, 2006 Letter Agreement Phase 1 Begins
Accordingly, on June 12, 2006, LBI entered into a letter agreement with General Catalyst Partners of Cambridge, Massachusetts ("GC") to set forth the terms on which the parties would move forward with "Phase 1" of a new "joint venture" focused on developing a direct to consumer multi-channel platform. The Letter Agreement contemplated that Phase 1 would commence on June 12, 2006 and end on September 21, 2006. The end date was subsequently extended through November 15, 2006. The two key objectives of the joint venture were stated as follows:
(i) to develop, enhance and maintain a world-class direct to consumer multi-channel technology platform designed to meet the near and long- term business needs of LBI's Victoria's Secret Direct r VSD") business (the "Platform') and (ii) to attract other direct retail customers (including, potentially, other LBI businesses) so that the venture is able to achieve meaningful commercial success.
The Letter Agreement sets forth various activities to occur during Phase 1 such as defining the scope of the business and conducting research to validate the addressable market, Phase 1 was also intended to allow LBI and GC to:
• Determine the scope and terms of commercial agreements and licensing arrangements between VSD/LBI and the joint venture.
• Determine the scope and terms of commercial agreements and any licensing arrangements between GC portfolio companies and the joint venture.
• Evaluate the desirability of the acquisition by either the joint venture or by LBI of an equity stake in Demandware ( a GC portfolio company).
•Operations during Phase 1 were to be financed by $5 million of cash — half advanced by LBI and half advanced by GC. LBI agreed that during Phase 1 each of Ruben Pinchanski, Steve Asbaty and Wendy Lahaye would be employed by or "seconded" from LBI to N2N on a full time basis. The joint venture was incorporated as Everest Commerce, Inc. on June 13, 2006 (the day after the Letter Agreement was signed) and soon thereafter changed its name to N2N.
Although GC and LBI projected that N2N would have expenses of $5 million during Phase 1, in fact expenses proved to be higher. On or about September 22, 2006 the N2N board approved the sale of additional convertible promissory notes in the amount of $1,000,000 (the "Second Bridge Financing"). On or about October 12, 2006, the N2N board approved the sale of additional convertible promissory notes in the amount of $1,500,000 (the "Third Bridge Financing").
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.I} Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 4 of 14 PAGEID #: 340 Ca .4 gleDRY46 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Deco Exhibit MANS B Page 4 of 14
Gail Stem, Esquire October 31, 2008 Page 3
During Phase 1, the N2N board approved compensation arrangements for Pinchanski, Asbaty and Lahaye which included, among other provisions, the following:
Non-Voting Name Common Stock Salary Bonus Rueben Pinchanski 5,000,000 $520,000 20% Steve Asbaty 1,000,000 $250,000 20% Wendy Lahaye 1,000,000 $250,000 20% •
Asbaty and Lahaye paid the purchase price for their common stock by delivering to the company promissory notes each in the principal amount of $100,000. Pinchanski apparently did not deliver a note or pay cash for the common stock granted to him. b. November 22. 2006 Transaction; Phase 2 Begins On November 22, 2006, LBI and GC entered into a series of agreements to effectuate their decision to proceed with "Phase 2" of N2N as contemplated by the June 2006 Letter Agreement. Specifically, the parties entered into the following principal investment documents: 1. Investment Agreement 2. Second Amended and Restated Charter 3. Stockholders Agreement 4. Registration Rights Agreement 5.. Management Rights Letter • These agreements documented the issuance by N2N of its Convertible Preferred Stock. GC funds purchased approximately $19.8 million worth of such securities and LBI purchased approximately $10.7 million worth of such securities at the initial and secondary closings under the Investment Agreement. In connection with signing the investment documents in November, 2006, the board of N2N also approved several other matters including:
BOSTON, MA PITTSBURGH. PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1}
. _ Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 5 of 14 PAGEID #: 341 Ca Akin? Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit NS B Page 5 of 14
Gail Stem, Esquire October 31, 2008 Page 4
• That certain Master DTC Platform License and Service Agreement by and among N2N and LBI and the Participation Schedule #1 thereto dated November 21, 2006 with VSD.
• Master Service Agreement by and between N2N and Demandware, Inc. (a GC poi tfolio company)
• Master Software License and Services Agreement by and between N2N and Choicestream, Inc. (a GC portfolio company).
The Investment Agreement also provided for the possibility of an "Additional Closing" at which the investors would purchase up to an additional 25,621,716 shares of convertible preferred stock. In order for the Additional Closing to occur, the parties needed to agree on or before April 30, 2008 on specifications for the platform to be built by N2N, delivery dates for the specifications and financing that would be needed for N2N to complete development. In addition, under Participation Schedule #1 to the LBI/N2N contract, by April 23, 2007 N2N was required to complete certain milestones including the tender of Release 1 to VSD for User Acceptance Testing and the development by April 30 of the Release 2 Joint Work Plan.
LBI claimed that the milestones were not timely delivered. Therefore, the Additional Closing contemplated in the November 2006 investment documents never occurred. The N2N board knew that failing to raise additional capital would be fatal to the continued viability of the venture. For example, in August 2006 the board received an Appraisal Report of its Non Voting Common Stock which indicated that "[N2N] expects to show losses and negative cash flow until at least 2009 and expects that cash requirements will total approximately $40 million before positive cash flow is obtained." Despite knowledge of the crippling implications of a lack of financing, N2N's directors and senior officers proceeded into the final death-knell phase of N2N with reckless disregard for the consequences on the company and its creditors. Instead, the officers and directors acted in self-interested fashion to protect themselves and/or their institutions. Indeed, development work continued in full throttle. Yet the work was directed to features and functions that were tailored exclusively to the needs of LBI and VSD and not required for general marketability of the platform.
c. The Final Phase; May 2007— December 2007
The final phase of N2N was characterized by the Company's staggering undercapitalization. To limp through the period, the board approved financing of $7,500,000 from the sale to the investors of additional convertible promissory notes on June 6, 2007, On November, 2007 the board approved an additional $7,500,000 in financing provided by LBI. Yet, these financings were completely inadequate and clearly not sufficient to allow the company to pay debts that it incurred during the period. The numbers are grim:
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY {K0380481.1) Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 6 of 14 PAGEID #: 342 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit • Calfigksi B Page 6 of 14
Gail Stem, Esquire October 31, 2008 Page 5 .
BALANCE SHEET ANALYSIS
6/30/07 7/31/07 8/31/07 9/30/07 10/31/07 11/30/07 12/31/07
Cash 8,536,248.83 6,234,960.92 4,086,821.12 2,930,058.50 1,819,5/ 4.19 1,959,362.89 2,108,107.65
Accounts Payable 3,511,615.56 3,929,018.34 7,520,347.67 8,038,540.68 12,546,755.74 8,196,698.57 10,228,189.42
Cumulative Deficit (29,443,619.34) (32,868,102.32) (37,296,994.20) (41,006,325.55) (45,605,150.63) (49,031,23728) (55,583,06827) Um)
An analysis of N2N's cash position also clearly shows the dire financial straights:
ZONE OF INSOLVENCY ANALYSIS
(000) 6/1/07 7/1/07 8/1/07 9/1/07 10/1/07 11/01/07 12101/07
Cash Beginning of Month 5,397.10 8,536.20 6,234.90 4,086.80 2,930.00 1,819.50 1,959.40
Loss in Subsequent 30 Days (4,466.20) (3,424.50) (4,429.00) (3,709.30) (4,598.80) (3,426.10) (6,551.80)
Accounts Payable at Beginning of Month (4,679.10) (3,511.60) (3,929.00) (7,520.30) (8,038.50) (12,546.80) (8,196.70)
Total Projected Cash Needs (9,145.30) (6,936.10) (8,358.00) (11,229.60) (12,637.30) (15,972.90) (14,748.50)
Projected Cash (Deficit) (3,748.20) 1,600.10 (2,123.10) (7,124.80) (9,707.30) (14,153.40) (12,789.10)
The board minutes during this period are devoid of any meaningful discussion of attempts to obtain shareholder or third party financing. Also lacking is any evidence that the board sought a strategic or financial buyer. There is also no evidence that the board sought to align the company's expenses with its financial reality. In fact, the officers and directors acted with reckless abandon during this period by causing N2N to enter into a new five year lease at approximately $121,700 per month and granting bonuses and pay raises to senior executives. These decisions caused the company's liquidity crisis to worsen in predictable fashion.
•
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTH POINTE, PA WHITE PLAINS, NY {K0380481,1) Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 7 of 14 PAGEID #: 343 • Ca - t 40 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit PS B Page 7 of 14
Gail Stern, Esquire October 31, 2008 Page 6
In December 2007, the board held a flurry on meetings in light of the company's cash crisis. Meetings were held on December 12, 17, 19, 20, 21 and 31. At these meetings, the board developed a scheme to pay employees from the company's general assets a sum totaling $3,532,806. Of this amount $2,070,387 was authorized to be paid to the company's eight top officers. Mr. Pinchanski, a board member and the CEO, participated in the deliberations concerning these payments and joined his fellow directors in voting unanimously to approve the payments. Mr. Pinchanski was paid $672,182, which was in addition to his $546,000 in salary and his August, 2007 bonus payment of $104,000. Mr. Asbaty was awarded $343,685 and Ms. Lahaye was awarded $328,438.
All N2N employees were terminated on or about December 18, 2007. On January 4, 2008, N2N entered into the Assignment for the Benefit of' Creditors. Claims in the amount of $13,388,574 have been determined to be allowable by the Assignee.
IL The Fiduciaries Breached Their Duties
The N2N officers and directors including the Fiduciaries had a legal obligation to act in good faith and on a fully informed basis in fulfilling their fiduciary obligations. Yet the Fiduciaries systematically ignored the known problem of the company's insolvency on and after April 2007. They failed to obtain relevant information and failed to meet and deliberate on the problem. Furthermore, the Fiduciaries let their own loyalties and conflicts trump their duties to the company. Noninterested officers and directors are entitled to rely on the business judgment rule in carrying out their duties in normal circumstances. That rule provides no protection to the Fiduciaries here given the egregious facts and demonstrated acts of self interest. 1. Each of the Fiduciaries was Conflicted • Under the Stockholders Agreement N2N was to have seven members on its board of directors. Two of the directors were to be nominated by LBI or its affiliates, two of the directors were to be nominated by GC entities; one director was to be Pinchanski; and the final two directors were to be persons with relevant industry experience and who were not affiliated with or employed by LBI or GC or its affiliates. No independent directors were ever appointed, nor do the board minutes reflect that any independent directors were ever considered. As a result, the five person board had no independent voices helping the directors navigate the numerous conflicts which impeded the members from fulfilling their fiduciary duties.
a. LBI
The LBI designees to the N2N board were Sharen Tumey ("Turney") and Martyn Redgrave ("Redgrave"). Turney was the President and Chief Executive Officer of Victoria's Secret Megabrand and Intimate Apparel, which oversees Victoria's Secret Stores, Victoria's Secret Direct, and Victoria's Secret Beauty. Redgrave was LBI's Executive Vice President and Chief
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
(K038048 I.1) Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 8 of 14 PAGEID #: 344
• • Ca 46 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit MANS B Page 8 of 14
Gail Stem, Esquire October 31, 2008 Page 7
Administrative Officer. Pinchanski was a party to an Employment Agreement with LBI and its subsidiaries effective August 16, 2006 while also a party to an Employment Agreement with N2N dated October 13, 2006. He also served as Executive Vice President of Limited Brands Direct from 2004 to 2006.
In addition to the fact that Tumey, Redgrave and Pinchanski all were tied to LBI, they supervised a management team that was full of LBI connections. Steve Asbaty was a co-founder and Chief Partnership Officer of N2N, and was employed as Vice President, Internet, for Limited Brands Direct from 2004 to 2006 (the year N2N was formed). Asbaty was party to an Employment Agreement with LBI and its subsidiaries effective September 1, 2006 while also a party to an Employment Agreement with N2N dated October 13, 2006. Wendy Lahaye was responsible for Limited Brands Direct to Consumer e-commerce strategy and development before becoming a co-founder and Chief R&D and Innovation Officer of N2N. On or about September 1, 2006, Lahaye entered into an employment agreement with LBI and its subsidiaries providing that, among other things, (i) LBI would place Lahaye on a leave of absence to permit her to work for N2N; (ii) Lahaye would continue to receive bi-weekly compensation and benefits from LBI for a set period while she worked for N2N; (iii) should Lahaye resign from N2N or be terminated for reasons other than cause, LBI would offer to reinstate Lahaye to her prior position at a compensation and benefit no less than what she received before working for N2N.
Numerous other LBI connections existed as well. As just one example, Nicole Interlandi, was an employee of LBI and/or its affiliates assigned to N2N and with the title of Director of FIR Administration. Interlandi was intimately involved in the day-to-day operations of N2N, acting as a member of the N2N "team" who managed the senior N2N management hiring process. She remained an employee of LBI until at least July 18, 2007. According to a July 18, 2007 terms of agreement between N2N and Interlandi, seventy percent of her salary was paid by "The Limited Brands" and the balance by N2N.
b. GC
GC placed Lawrence Bohn and Joel Cutler on the N2N board. Bohn and Cutler are Managing Directors of GC. At least three GC portfolio companies (Demandware, Choicestream and Optaros) contracted with N2N to provide goods and services. Mr. Bohn is on the board of all three entities; Mr. Cutler is on the board of one (Choicestream).
2. The Officers and Director Failed to Act to Correct Misleading and Fraudulent Statements
Although the N2N board and officers including the Fiduciaries knew that N2N was significantly undercapitalized in mid-2007, N2N made statements that it knew or should have known would mislead creditors in order to induce those creditors to continue providing goods and services to N2N for the benefit of LEI, GC and the senior management team. For example, on or about
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, OE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1} Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 9 of 14 PAGEID #: 345 Ca ;A, +I • 46 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit Y 'NS B Page 9 of 14
Gail Stem, Esquire October 31, 2008 Page 8
July 23, 2007, N2N issued a press release stating in relevant part that "Victoria's Secret Direct will begin to operate its $1.4 billion direct-to-consumer business on N2N's on-demand platform in the second half of 2007." Tumey was quoted in the press release as saying, "Our decision to embrace the N2N platform was strongly influenced by the promise of ongoing technology innovation. N2N's impressive Platform Innovation Ecosystem is a key element in ensuring a robust infrastructure on which we can grow our business for many years." Tumey made this statement to lead creditors to continue to provide goods and services to N2N at a time when the company was inadequately capitalized and insolvent. At the very least the statement was made with reckless disregard for the company's dire financial condition. The Fiduciaries took no action to correct these misstatements.
On August 23, 2007, LBI held its Second Quarter earnings conference call. During the conference call, Redgrave publicly stated that LBI was "investing in new front-end, Internet, and call center systems for all of our direct channel businesses." During the same conference call, Tumey publicly stated: "Turning our attention to the direct channel, the catalog and the Internet channel continues to be an important part of the 360-degree aspect we provide our customers and we maintained momentum through the second quarter in the direct channel." These statements, made after LBI determined that N2N failed to meet the April 2007 milestones described above in Part 1(b) and at a time when N2N was significantly undercapitalized, had the effect of misleading creditors of N2N as to the financial status of N2N at a time when its only customer contract was with LW. The Fiduciaries took no action to correct these misstatements.
On or about September 17, 2007, N2N issued a press release stating in part: "Victoria's Secret Direct will begin running its $1.4 billion business on N2N's platform in early 2008." The quoted statement was knowingly false and was intended to induce creditors to continue to provide goods and services to N2N under the misguided belief that N2N continued to have the financial support from its shareholders needed to pay its debts as they became due. At the very least, the statement was made with reckless disregard for the company's dire financial condition. The Fiduciaries took no action to correct these misstatements.
The corporate records of N2N indicate that from July 12, 2007 to December 2007, the period in which the public statements referred to above were made, the board of directors of N2N failed to conduct one single in-person meeting.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1} •
Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 10 of 14 PAGED #: 346 Ca .1 ace • 46 Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit B Page 10 of 14
Gail Stem, Esquire October 31, 2008 Page 9
3. The July, 2007 Lease Transaction Was Wasteful
On or about July 11, 2007, the board voted to approve the execution of a new five year lease for up to 29,366 square feet at One Cambridge Center, Cambridge, Massachusetts. Base rent under the lease was approximately $121,700 per month. In addition, N2N posted a letter of credit in the amount of $1,052,282, which amount was drawn upon in full by the landlord after N2N's cessation of operations.
The Cambridge Center lease was signed just months before N2N shut its doors. The directors and officers knew at the time that the April 2007 milestone had not been achieved and that financing was inadequate. Yet the board approved the lease transaction - - and then failed to meet at any other time during July, August, September, October, and November. The board did approve a $7,500,000 bridge financing from LBI in November by written consent. From these funds, N2N paid severance pay, travel and expense reimbursement, and health benefits to employees totaling $3,454,131.
4. The August 2007 Bonus Payments Were Not Based on Any Identified Criteria Nor in the Comp. y's Best Interest
On or about August 31, 2007, N2N paid certain employees bonus payments for 2006. Payments included the following:
Ruben Pinchanski $104,000
Steve Asbaty $ 50,000
Wendy Lahaye $ 50,000
There are no records of any board approval of these payments, nor is there any record of any Compensation Committee meeting regarding these payments. The contracts of Pinchanski, Asbaty and Lahaye each provides that each employee will be eligible for a bonus "upon attainment of annually established performance objectives." No such performance objectives have been located by the Assignee in any of the Company's books and records. Payroll records, also indicate that Pinchanski, Asbaty and Lahaye obtained five percent salary increases and payments for retroactive salary adjustments back to April 1, 2007. At the time of the August bonus payment and pay raises, N2N was insolvent and just months away from shutdown.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1} Case: 2:09-cv-01008-EAS -MRA Doc #1 33-2 Filed: 06/25/10 Page: 11 of 14 PAGED 14: 347 Ca –.A 'WO Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit NS B Page 11 of 14
Gail Stem, Esquire October 31, 2008 Page 10
5. The December 2007 Pa ipinyesstents to Ent 's Best Interestt
In December 2007 N2N ran out of cash — and ran out of choices. Neither GC nor LBI was willing to contribute additional capital to the company for ongoing operations. With approximately eighty employees on the payroll, the board members acted again to protect their own exposure for personal liability for payroll-related matters. As noted above, the company's books and records reflect that $3,454,131 was paid on account of severance pay, travel and expense reimbursement, and health benefits to employees. In a vote taken on December 17, the board determined to pay severance to employees including $1,344,305.94 paid to the following current and/or former LBI employees:
Ruben Pinchanski $672,182.60
Steve Asbaty $343,685.33
Wendy Lahaye $328,438.01
Further, the board determined to "collect" amounts due under the $100,000 promissory notes issued by Wendy Lahaye and Steve Asbaty by offsetting the amount of such notes from the checks provided to each of them. Payment was made to Pinchanski without any offset - - notwithstanding that he never paid for the stock granted to him nor issued a note to the company for the stock. In that regard, the board minutes from December 17, 2007 state that "The Board also discussed a receivable from Ruben Pinchanski and concluded to further investigate the nature of such receivable before determining whether it should be collected." No evidence of any such investigation has been obtained and there is no evidence any such receivable was ever collected by the company.
At a December 20th, 2007 board meeting, GC noted its disapproval of LBI's decision not to advance funds to satisfy any creditor claims: GC "noted an objection over Limited Brands' unwillingness to extend such additional funding for purposes of meeting obligations to the Company's creditors." At the same time, GC also noted that it too would not extend any funding.
Cash to pay the December, 2007 payments was obtained from financing provided from LBI, . which the board approved at a December 20 board meeting ("December 2007 Financing"),I
I LBI, N2N and GC entered into a letter agreement dated December 14, 2007 pursuant to which the parties purport to require that N2N use the December 2007 financing solely for the severance payments. No language in the December 2007 Note itself contains such a restriction. The N2N Commerce, Inc. Severance Plan filed with the U.S.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY {K0380481.0 Case: 2:09-cv-01008-EAS -MRA Doc #133-2 Filed: 06/25/10 Page: 12 of 14 PAGED #: 348 Cafiffnbs Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit B Page 12 of 14
Gail Stern, Esquire October 31, 2008 Page 11
6. Post-Assignment Conduct. Even after N2N entered into the assignment for the benefit of creditors, representatives of LBI and GC took steps that confirm that, during their time as directors and officers of N2N, their interests were never about fulfilling fiduciary duties of loyalty and care to N2N. In February 2008, GC prepared a draft complaint naming as defendants LBI, VSD, Redgrave and other LBI senior executives. The draft complaint alleges that (i) LBI induced GC to invest in N2N based on blatant misrepresentations, (ii) LBI exercised total domination and control of N2N, and (iii) LSI willfidly destroyed N2N because of internal developments at LBI including LBI's need to alter its off balance sheet treatment of N2N because of post-Enron accounting regulations. GC's draft complaint alleges twelve counts against various of the intended defendants including fraud, violations of MGL ch. 93A, violations of Section 10(b) of the Exchange Act and Rule 10(b)(5), negligent misrepresentation, breach of fiduciary duty, and negligence. Upon information and belief, LBI settled the allegations in the draft complaint by making a multimillion payment to GC. The Assignee also recently learned that LBI apparently obtained insurance proceeds from Federal Insurance Company (Chubb) from one or more policies purchased by N2N. These policies were purchased by N2N at the direction of its directors and/or officers on or about January 4, 2008 – the date of the Assignment Agreement. Upon information and belief, part of the settlement between GC and LBI was an agreement by GC to cooperate with any efforts by LBI to obtain intellectual property and other N2N assets marketed by the Assignee for sale at auction. LBI did not bid at the auction. It appears it did not need to — having sought GC's cooperation in any effort by LBI to obtain the N2N intellectual property. Over $50 million in capital was deployed to design and develop the N2N technology. The Assignee conducted an extensive marketing effort for the assets of N2N in an effort to maximize a recovery for creditors. An executive summary describing the available assets was sent to approximately one hundred and fifty parties including venture capital finns, IT consultants, and large scale retailers. A comprehensive bid package with detailed information on the technology was sent to numerous parties that agreed to nondisclosure agreements. Ultimately, despite these efforts and wide-spread news and regular press releases about the availability of the assets for auction, only a few bids were actually received. The winning bidder, with a relatively nominal purchase price, was Demandware, a portfolio company of GC.
Department of Labor, which Plan is subject to ERISA, states that the fluids used to make the payments come from N2N's "general assets" and that no person other than N2N held any right title or interest in or to any such assets.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.0 Case: 2:09-cv-01008-EAS -MRA Doc #1 33-2 Filed: 06/25/10 Page: 13 of 14 PAGED 14: 349 Ca 4& Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit B Page 13 of 14
Gail Stem, Esquire Oetub-er3 I, 2008 Page 12
III. Conclusion
As a direct and proximate result of the Fiduciaries' breaches of their duties, N2N has suffered substantial monetary damages. Specifically, as a result of these acts and omissions, N2N incurred substantial debt that the Fiduciaries knew N2N could not pay; the Fiduciaries breached their duty of care by authorizing and/or entering into transactions (such as the One Cambridge Center lease, the payment of bonuses in August 2007, the payment of severance in December 2007 and the incurrence of additional unsecured debt) that were not in the company's best interest; and the Fiduciaries breached their duty of loyalty by putting their own pecuniary interests and/or their loyalties to their institutions ahead of the interests of N2N.
The total amount of allowed creditor claims against N2N is $13,388,574. There are insufficient funds in N2N's estate to repay these claims. As these obligations were incurred due to the breaches of the Fiduciaries' duties, including their duties of loyalty and care, demand is hereby made for the immediate payment to the Assignee of $13,388,574 plus attorneys fees and cost of administration. If this claim is not paid immediately, the Assignee will commence, on behalf of the estate of N2N, an action against each of the Fiduciaries and any other responsible parties to recover these amounts, plus any other amounts allowable as a matter of law.
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MORGANTOWN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1) Case: 2:09-cv-01008-EAS -MRA Doc #: 33-2 Filed: 06/25/10 Page: 14 of 14 PAGED #: 350 Ca.9, t n! -4 to '65_ Doc 34-2 Filed 02/23/09 Entered 02/23/09 14:29:19 Desc Exhibit ' NS B Page 14 of 14 •
Gail Stem, Esquire October 31, 2008 Page 13
The Fiduciaries are directed to take appropriate steps to preserve all documents, including hard- copies, emails, electronic files, backup media, etc., that relate to their tenure as an officer and/or director of N2N and to any of the claims described above.
Sincerely,
Kt/John G. houghnane cc: Joseph F. Finn, Jr., as Assignee for the Benefit of Creditors of N2N Commerce, Inc.
Claims Department, Chubb Group of Insurance Companies 82 Hopmeadow Street Simsbury, CT 06070-7683 (Regarding Policy Nos. 8209-2070 and 8209-2106)
•
BOSTON, MA PITTSBURGH, PA HARRISBURG, PA PHILADELPHIA, PA WASHINGTON, DC WILMINGTON, DE MOFtGANTOVVN, WV SOUTHPOINTE, PA WHITE PLAINS, NY
{K0380481.1} Case: 2:09-cv-01008-EAS -MRA Doc #: 33-3 Filed: 06/25/10 Page: 1 of 4 PAGEID #: 351
EXHIBIT C
Case: 2:09-cv-01008-EAS -MRA Doc #: 33-3 Filed: 06/25/10 Page: 2 of 4 PAGEID #: 352
QERT1FJCAT1QMOF:N iI D *LAI1TWF PMS^J'A^N I ,l a.I BD AI SE. U!RI'I`fES I,AU S
P. ,MB'ERS.AND..0 POE. 7F,ITTERS.::LOCAI.S' :5,02 &-633 :FE TRUST FUN 0. ('`Plaintiff') declares::
1 Pluj ff'has tevie^vocl,a...1? com lainfi;and;a ithor^ d its .filing. Z lay tiffdid na^t„ac ^ixethesectlrsty hat:iathe'suL^j Otof this acfioi^^tthe cction ofplairaCiff 's.'cotinsel or`ih order' P;art^cipate rn thzs private aeta^a ox any other;litigat^cn uzidertl a fed tQ-:securities lavts. Platriti:ff-is wtllrrlg o serve as ,'r laresentaCive park on behalf of. class; Inc uGtling provii{ing t stlrnariy at d iv's tion and tnal; of necessary. 4 Plaintrf k^as m c e t^Ye fallovvirag ttMasaction(s) clwln ;the Glass Feriod,in the:saeurrt es-that are tie gtiLject of this x6'011;
SecuErity `FransadtLO , . Date P iee.I?er Shane
See att.., che Schcdu' l'e A.
Pla r, f^,ltas not-sauahi to serue Qr sewed as a representaki^e party for a elass.:in.an action fiTec ufidbx dth s curttres Fauvs ex ept.as detailed beY yr during: l e.threeyears::prior tatl^e date afthYS.C.ertifica^ion. .
6 ' The l l inl ff +11 .n t, accept: a tY.l? Yment f'or sertR ;as;a.representative fra3 vn behalf: Qf the class..beyond tlie: Plaintiff ,pro rata share of, an recovery, .
— LImitLt7HitA7VOS - .. ., _ e^'•'s-rr—' f!{?ta Py ' 4. ^ I: I Ir - r, — ^I r. Case: 2:09-cv-01008-EAS -MRA Doc #: 33-3 Filed: 06/25/10 Page: 3 of 4 PAGEID #: 353
exce ►t such reas.QnaEbl eosts;and expensed tnclurlui a'st'wages)' ^ir.e I relating to the re resez1tatio dThe Mass or„lapprgved by the court.
. I el1e undernal'"p ,. y of pe^lury :Itt^at folre^ex^g th^ . is true. and,' corFect.
. . E^zecuted tL^isif^^`'^ day'; ^of' ^P^e^:^' 20^'^ _' ...: I B S A] D Pr'EF ' T SRS
L^OrG^^4 S 5;^4^.8c 633..P, i NS ON TT^^[IST
By.
M.... Its:
-
--
1 k y `''' .
, ^Y' ., .' 1
r '' Case: 2:09-cv-01008-EAS -MRA Doc #: 33-3 Filed: 06/25/10 Page: 4 of 4 PAGEID #: 354
SCHEDULE A
SECURITIES TRANSACTIONS
Acquisitions
Date Type/Amount of Acq uired Securities Acq uired Price
10/05/2007 6,000 $22.59 10/12/2007 8,000 $22.12
'Opening position of 51,200 shares.