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In Re: Omnicom Group, Inc. Securities Litigation 02-CV-04483-Corrected

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In Re: Omnicom Group, Inc. Securities Litigation 02-CV-04483-Corrected t-d UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE OMNICOM GROUP, INC. 02-CV-4483 (RCC) SECURITIES LITIGATION JURY TRIAL DEMANDED CORRECTED CONSOLIDATED CLASS ACTION COMPLAIN T Elaine S . Kusel (EK-2753) Max W. Berger (MB-501 0) MILBERG WEISS BERSHAD HYNES J. Erik Sandstedt (JS-9148) & LERACH LLP Joseph A. Fonti (JF-3201 ) One Pennsylvania Plaza BERNSTEIN LITOWITZ BERGER & New York, NY 10119-0165 GROSSMANN LL P (212) 594-5300 1285 Avenue of the Americas Co-Lead Counsel for Lead Plaintiff New York, NY 1001 9 Phillip Szanto and the Class (212) 554-1400 Co-Lead Counsel for Lead Plaintiff New Orleans Employees' Retirement System and the Class TABLE OF CONTENTS Page I. NATURE OF THE ACTION . 1 II. JURISDICTION AND VENUE . 6 III. PARTIES . 7 A. Lead Plaintiffs . 7 B . Defendants . 8 C . Related Individuals And Entities . 1 3 IV. CLASS ACTION ALLEGATIONS . 1 4 V . SUBSTANTIVE ALLEGATIONS . 1 6 A. Company Background . 1 6 (i) Omnicom's Growth By Acquisition . 1 7 (ii) Omnicom's Touted Year-Over-Year Growth of Revenu e and Earnings . 1 7 (iii) Omnicom' s Reported "Organic Growth" . 1 8 (iv) Omnicom' s Failure to Disclose Liabilities in Connectio n with Acquisitions . 2 1 B. Omnicom Jumps on the Dot-Com Bandwagon . 22 C. The Internet Bubble Bursts . 25 D. Omnicom' s Investments Are Devastated . 26 (i) Agency . 27 (ii) Organic . 30 -i- 4 a - i (iii) Razorfish . .32 E . Omnicom Creates Seneca to Avoid Taking Losses and Write-Downs . 34 (i) The Creation of Seneca . 36 (ii) Charges Avoided by Omnicom Through the Creation o f Seneca . 3 6 F. Omnicom Exercised Control Over Seneca . 3 9 (i) Omnicom 's Role in the Seneca Take-Over of Agency . 42 (ii) Omnicom 's Role in Tender Offer of Organic Shares . 46 G. Revelation of the Fraud . 49 VI. GAAP VIOLATIONS . 49 A. Omnicom Violated GAAP By Failing to Write-Down Its Investments in the Seneca Entities in Fiscal 2000 and/or the First Qua rter of 2001 . 52 B . Omnicom Violated GAAP By Failing to Record the Seneca Transaction at Fair Value . 57 C. Omnicom Violated GAAP By Failing to Properly Account for It s Investment in Seneca . 6 1 D. The Defendants Violated GAAP By Failing to Disclose Liabilities Relating to Omnicom's Acquisition . 65 E. The Defendants Violated SEC Rules By Failing to Disclose Known Trends and Uncertainties . 67 VII. FALSE AND MISLEADING STATEMENTS . 69 A . Omnicom's Fiscal Year 2000 Results . 69 B . Omnicom's First Quarter Fiscal Year 2001 Results . 77 C. Omnicom's Second Quarter Fiscal Year 2001 Results . 8 3 -ii- t D. Omnicom's Third Quarter Fiscal Year 2001 Results . 87 E. Omnicom's Fiscal Year 2001 Results . 9 1 F. Omnicom's First Quarter Fiscal Year 2002 Results . 94 VIII. ADDITIONAL SCIENTER ALLEGATIONS . 98 A. The Defendants Had Actual Knowledge of the Accounting Improprietie s and Misleading Nature of its Organic Growth Calculation . 99 (i) The Seneca Transaction . 99 (ii) Organic Growth and Liabilities Associated with Acquisitions . .103 B . The Facts and Circumstances of this Case Support a Strong Inference That The Defendants Acted With Scienter . 104 (i) The Defendants had the Motive and Opportunity to Commit Fraud . 104 (ii) The Nature and Circumstances of the Seneca Transaction and its Accounting Treatment Support a Strong Inferenc e that the Defendants Acted with Scienter . 108 IX. APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE- MARKET DOCTRINE . * 110 X. NO SAFE HARBOR . 11 1 XI. CLAIMS FOR RELIEF COUNT ONE Violation of Section 10(b) of the Exchange Act and Rule l Ob-5 Promulgated Thereunder Against All Defendants . 11 2 COUNT TWO Violation of Section 20(a) of the Exchange Act Against th e Individual Defendants . 11 5 XII. PRAYER FOR RELIEF . .. 11 7 -iii- XIH. JURY TRIAL DEMAND . 118 I k CORRECTED CONSOLIDATED CLASS ACTION COMPLAIN T Lead Plaintiffs, by their undersigned attorneys, on behalf of themselves and the Class (as defined below), for their Consolidated Class Action Complaint (the "Complaint"), make the following allegations against the defendants based upon the investigation conducted by and under the supervision of counsel, which included reviewing and analyzing information relating to the relevant time period obtained from numerous public and proprietary sources (such as LEXIS- NEXIS, Dow Jones, Bloomberg, and First Call reports), including, among other things , Securities and Exchange Commission ("SEC") filings, publicly available press releases, published interviews, news articles and other media reports (including those disseminated in print and by electronic media), reports of securities analysts and investor advisory services, interviews with former employees of Omnicom Group, Inc . ("Omnicom" or the "Company") and its various subsidiaries and agencies, and sworn testimony from depositions taken in other proceedings. 1. NATURE OF THE ACTION 1 . This is a class action brought on behalf of a class (the "Class") consisting of all persons who purchased Omnicom common stock during the period from February 20, 2001 through and including June 11, 2002 (the "Class Period"), to recover damages caused by the defendants' violation of federal securities laws . 2. Throughout the Class Period, Omnicom was a company that was obsessed with meeting Wall Street's consensus estimates, consistently reporting year-over-year growth in revenues and earnings and outpacing its competitors in a key metric against which all advertising firms are measured, "organic growth ." Omnicom reported dramatic growth in revenue and earnings from operations throughout the Class Period, and emphasized the fact that it had a n unbroken streak of year-over-year growth from operations that reached back almost a decade . Omnicom was only able to achieve its astounding year-over-year growth b y acquiring large numbers of smaller companies, which together contributed significantly t o Omnicom's bottom line. Between 1999 and 2002, Omnicom acquired hundreds of companies, which it paid for, in large part, through the issuance of common stock. In view of their use of the Company's stock as currency in these transactions, the defendants had a serious motivation to keep the stock price high and, thereby, avoid the dilution of Omnicom's shareholders' equity an d its earnings per share . 4. The defendants structured the Company's acquisitions through earn-out payments ("earn-outs"). These earn-outs generally had the effect of postponing large portions o f Omnicom's payment obligations over three to five years . Similarly, in connection with some of its acquisitions, Omnicom undertook an additional liability in the form of an obligation t o purchase some or all of the remaining stock of the acquired companies . The defendants, however, never disclosed the amounts of these additional obligations to shareholders . This was the case despite the fact that they represented hundreds of millions of dollars of liabilities , amounts that obviously would have been material to investors . Furthermore, throughout the Class Period, the defendants understood that investors were leery of companies that could only achieve growth through acquisitions . Accordingly, Omnicom, like all of its competitors who engaged in similar strategies , provided investors with a statistic called "organic growth ." Investors generally understood organic growth 2 to mean growth from existing operations - that is, the amount of growth generated from entitie s that it had been owned for more than one year . This figure, which was the most critical metric to analysts and investors in assessing the value of companies in the advertising field, purportedl y excluded growth associated with recent acquisitions . Unlike its competitors, and unbeknownst t o investors, however, Omnicom, included a portion of its acquired companies' growth in its ow n organic growth figures. Despite this fact, throughout the Class Period, Omnicom compared its organic growth figures to its competitors', repeatedly claiming that it was outpacing thos e competitors in this key metric . Moreover, because overall advertising growth was flat during th e Class Period, the fact that Omnicom's organic growth rate purportedly outpaced that of it s competitors was of material importance to investors . 6. As part of its strategy of growth-by acquisition, beginning in or about 1996 , Omnicom began to invest in e-services companies . However, with the crash of the internet market in March of 2000 and the concomitant decline in value of Omnicom's numerou s investments in internet companies such as Agency .com Ltd. ("Agency"), Organic, Inc . ("Organic") and Razorfish, Inc . ("Razorfish"), Omnicom faced a dire situation. By at least the fourth quarter of 2000, the defendants knew that Omnicom would have to account for hug e losses it sustained in connection with its investment in Agency and take substantial write-down s with respect to all of its e-services investments, which they knew had no chance of rebounding . The defendants also knew that these losses and write-downs would have a dramatic effect o n Omnicom's earnings and would force them to admit that Omnicom's earnings from operation s had declined for the first time in nearly a decade . 3 7. But rather than admit that Omnicom had critically misjudged the viability of th e internet advertising and services market, and accept the inevitable write-downs and realized losses (as at least one of Omnicom's major competitors, Interpublic, was forced to do during th e first quarter of 2001), the defendants chose a different path . They chose instead to create a supposedly seperate entity, Seneca Investments , LLC ("Seneca"), which would serve as a dumping ground for Omnicom's losing investments and allow them to avoid booking losses o r taking write-downs that would negatively impact their financial results . In so doing, the defendants avoided charges to earnings totaling more than $20 million, which would have reduced the Company' s earnings by more than $0.11 per share.
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