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.
8. Seneca was created in May 2001 as a joint venture between Omnicom an d
Pegasus Partners II, LP ("Pegasus"), a private investment firm run by a former Drexel Burnha m investment banker, Craig Cogut. Omnicom transferred all of its losing internet investments - which it held in a wholly-owned subsidiary called Communicade Inc. ("Communicade") - to
Seneca and, in return, received preferred stock in Seneca, which it valued at exactly the same amount at which it was carrying its e-services investments at the time of the transfer . Thus, according to Omnicom, there was no reportable loss or gain associated with the Senec a transaction .
9. As has now been revealed, however, the Seneca transaction was a sham . Seneca was, in fact, nothing more than a paper transaction that had the effect of masking the true state o f
Omnicom's financial results . Following the transaction, Omnicom exercised control over its
Seneca and its e-services investments, which were now supposedly owned by Seneca. Omnicom
4 admitted this fact by making certain filings with the SEC in connection with subsequent transactions industry the Seneca entities .
10. Moreover, Omnicon exercised day-to-day control over Seneca. Seneca was not run by employees of Pegasus, who were supposedly the "turn-around specialists ." Rather, it was run by the very same Omnicom officials that had managed these investments for Omnicom.
Notably, although Seneca purported to be a separate entity, public records indicate that it had
$192,000,000 in revenues in 2001, but only four employees . It operated out of Omnicom's
Madison Avenue headquarters, and was wholly dependent on Omnicom for its administration and staffing. In fact, as of the date of this complaint , when one called Seneca's offices, one was ultimately greeted by the receptionist for Omnicom . Perhaps most importantly, Seneca's most critical business decisions - for example , the decision of what price would be paid to tak e
Agency private after the Seneca transaction - were made by Omnicom .
11 . In view of the true nature of the Seneca tr ansaction and the substantial losses associated with the entities that were purportedly transferred to Seneca (hereinafter, the "Seneca entities"), Omnicom' s accounting for Seneca and the Seneca entities violated generally accepted accounting principles ("GAAP"). Furthermore, the Company' s handling of the transaction perpetrated a fraud on investors in so far as it masked the true state of Omnicom's fin ancial results by artificially inflating the Company' s earnings.
12. These facts were only revealed following the resignation of the Chairman of
Omnicom's Audit Committee, which was prompted by the defend ants' creation of Seneca and
5 their subsequent attempts to buy back the very entities that were initially transferred to Seneca , and the publication of an article in The Wall Street Journal on June 12, 2002, disclosing this fact.
13 . But The Journal article went further to reveal that the creation of Seneca was onl y one part of the broader scheme to defraud investors into believing that the Company was mor e profitable than it actually was. Specifically, The Journal article revealed that the Company als o misled investors with respect to its "organic growth" figures, and that the Company had failed to disclose the amounts of liabilities that it undertook in connection with its aggressive strategy of growth by acquisition. By engaging in these deceptive practices, the defendants were able to artificially inflate the stock price of Omnicom throughout the Class Period .
14. As a result of the disclosure of these improp rieties, the price of Omnicom common stock plummeted from $77 .26 on June 11, 2002 to $50 .94 on June 13, 2002 .
II. JURISDICTION AND VENU E
15 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) o f the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S .C . §§ 78j(b) and 78t(a), and
Rule lOb-5 , 17 C.F.R. § 240.10b-5 promulgated thereunder .
16. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C . §§ 1331 and 1337 and Section 27 of the Exchange Act, 15 U .S .C. § 78aa.
17. Venue is proper in this District pursuant to Section 27 of the Exchange Act, an d
28 U.S .C. § 1391(b). Omnicom maintains its principal place of business in this Dist rict and many of the acts and practices complained of herein, including the dissemination to the investing
6 public of the misleading statements and omissions specified below, occurred in substantial part in this District.
18 . In connection with the acts alleged in this complaint, defendants, directly o r indirectly, used the means and instrumentalities of interstate commerce, including, but no t limited to, the United States mails, interstate telephone communications and the facilities of the national securities markets .
III. PARTIES
A. Lead Plaintiffs
19 . By order entered February 2, 2003, the Court appointed Phillip Szanto and Ne w
Orleans Employees' Retirement System as Lead Plaintiffs in this action pursuant to 15 U .S .C .
§78u-4.
20. Lead Plaintiff Phillip Szanto ("Szanto") is an individual investor who purchased
Omnicom common stock at an artificially inflated price on February 19, 2002, as set forth in th e certification attached as Exhibit A. Szanto suffered damages as a result of the violations of the federal securities laws alleged herein .
21 . Lead Plaintiff New Orleans Employees' Retirement System ("NORS") is a publi c pension fund system organized for the benefit of the current and retired public employees of the
City of New Orleans . NORS is located in New Orleans, Louisiana, and has total assets o f approximately $330 million . NORS purchased Omnicom common stock at artificially inflate d prices during the Class Period, as set forth in the certification attached as Exhibit B . NORS suffered damages as a result of the violation of the federal securities laws alleged herein .
7 B. Defendants
22. Defendant Omnicom is a New York corporation with its principal place o f business located at 437 Madison Avenue, New York, NY 10022 . The Company filed annual , quarterly and other reports with the SEC, and its common stock is listed and traded on the Ne w
York Stock Exchange ("NYSE") under the symbol OMC. The Company is a marketing and corporate communications company. According to the company's press releases, Omnicom has grown its strategic holdings to over 1,500 subsidiary agencies operating in more than 10 0 countries. The Company's wholly and partially owned businesses provide communication s services to clients on a national and international basis. The Company's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory and business-to-business advertising, employee communications and environmental design.
23. Defendant John D . Wren ("Wren") has served as Omnicom's Chief Executiv e
Officer ("CEO") and President since 1997 . Prior to 1997 he served as President of Omnicom .
Defendant Wren has been a director of Omnicom since 1993 . Defendant Wren signed the
Company' s annual reports filed with the SEC on Form 10-K for fiscal years 2000 and 200 1
("Forms 10-K") and the Company's Annual Reports to Shareholders for 2000 and 2001 . As
CEO, Wren was also responsible for reviewing each of the Company's quarterly reports file d with the SEC on Form 10-Q. During the Class Period, defendant Wren made numerous false an d
8 misleading statements during the Company's conference calls, meetings, press releases and th e
Annual Reports to Shareholders, as more particularly set forth below.
24. Defendant Randall J. Weisenburger ("Weisenburger") has been Omnicom's
Executive Vice President and Chief Financial Officer since 1999. Weisenburger signed th e
Company's Forms 10-K; Quarterly Reports on Form 10-Q for the quarters ended March 31, 200 1
(filed on May 14, 2001), June 30, 2001 (filed on August 14, 2001), September 30, 2001 (filed on
November 14, 2001), and March 30, 2002 (filed on May 15, 2002) ("Forms 10-Q") ; and three
Schedule 13D/A forms filed on May 4, 2001 ("Schedules 13 D/A"). In addition, defendant
Weisenburger signed proxy statements filed with the SEC on behalf of Omnicom as a control person of Seneca in connection with the going private transactions of Agency and Organic a s detailed below. During the Class Period, Weisenburger also made numerous false an d misleading statements during the Company' s conference calls and meetings as more particularly set forth below .
25. Defendant Bruce Crawford ("Crawford") has been a member of Omnicom's Boar d of Directors since 1989, and has served as its chairman since 1995 . Because of his position,
Defendant Crawford attended and led Omnicom's Board meetings and oversaw the Company' s management . During the Class Period, Defendant Crawford signed Omnicom's Form 10-K fo r
2000 and 2001 .
26. Defendant Philip J. Angelastro ("Angelastro") has been Omnicom's Senior Vic e
President since January of 2002 and its Controller (Principal Accounting Officer) since 1999. In his capacity as Controller, defendant Angelastro oversaw the preparation of Omnicom's quarterly
9 and annual reports to the SEC, he signed the Company's Form 10-Ks, and he signed each of th e
Form 10-Qs filed during the Class Period .
27. Defendants Wren, Weisenburger, Crawford and Angelastro are collectively referred to herein as the "Individual Defendants ."
28. By reason of their positions with the Company, the individual defendants had access to internal Company documents, reports and other information, including the advers e public information concerning the special purpose entity, the Company's financial condition an d future prospects, and attended management and/or board of director meetings at which time suc h information was or should have been discussed. As a result of the foregoing, each Individual
Defendant was responsible for the truthfulness and accuracy of the Company's public reports ,
SEC filings and press releases described herein.
29 . Omnicom and the individual defendants, as officers and directors of a publicly- held company, had a duty to promptly disseminate truthful and accurate information with respec t to Omnicom and to promptly correct any public statements issued by or on behalf of th e
Company which had become false or misleading .
30. Each of the defendants knew or recklessly disregarded that the deceptive conduct , as well as the false and/or misleading statements and omissions complained of herein, woul d adversely affect the integrity of the market for the Company's common stock and would caus e the price of the Company 's common stock to become artificially inflated. Each of the defendants acted knowingly or in such a reckless manner as to constitute a fraud and deceit upon Plaintiffs and the other members of the Class .
10 31 . As officers and controlling persons of a publicly-held company whose commo n stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NYS E and governed by the provisions of the federal securities laws, the individual defendants each ha d a duty to promptly disseminate accurate and truthful information with respect to the Company's performance, operations, business, management and present and future business prospects, and to promptly correct any previously-issued statements that had become materially misleading o r untrue, so that the market price of the Company's publicly-traded common stock would be base d upon truthful and accurate information . The individual defendants' misrepresentations an d omissions during the Class Period violated these specific requirements and obligations .
32. The individual defendants, because of their positions of control and authority a s officers and/or directors of the Company, were able to, and did, control the content of the variou s
SEC filings, press releases and other public statements pertaining to the Company during th e
Class Period. Each Individual Defendant was provided with copies of the documents allege d herein to be misleading prior to their issuance and/or had the ability and/or opportunity to preven t their issuance or cause them to be corrected . Accordingly, each of the individual defendants i s responsible for the accuracy of the public reports and releases detailed herein and is therefor e primarily liable for the misrepresentations contained therein. The individual defendants are also liable as controlling persons of the Company.
33 . It is appropriate to treat the individual defendants as a group for pleading purpose s and to presume that the false, misleading and incomplete information conveyed in th e
Company's public filings and corporate press releases as alleged herein were the collectiv e
11 actions of the narrowly defined group of individual defendants identified above . Each of the individual defendants, by virtue of his high-level positions with the Company, directly participated in the management of the Company and the dissemination of public statements regarding Omnicom during the Class Period, was directly involved in day-to-day operations of the Company at the highest levels, and was privy to confidential, proprietary informatio n concerning the Company and its business and operations, as alleged herein, including without limitation, the existence and Omnicom's usage of special purpose entities to improve Omnicom's apparent financial results . The individual defendants were directly involved in making, drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, and/or were aware or recklessly disregarded, that the false and misleading statements were being issued regarding the Company or that deceptive conduct was undertaken in connection with the financial reporting for the special purpose entity.
34. Each of the defendants is liable as a primary violator in making false and misleading statements, and/or for participating in a fraudulent scheme and course of business tha t operated as a fraud or deceit on purchasers of Omnicom common stock during the Class Period .
The fraudulent scheme and course of business was designed to and did : (i) deceive the investing public, including Lead Plaintiffs and other Class members ; (ii) artificially inflate the price of
Omnicom common stock during the Class Period; (iii) and cause Lead Plaintiffs and other members of the Class to purchase Omnicom common stock at inflated prices.
12 C. Related Individuals And Entities
35. Seneca is the entity that was formed on May 2, 2001 as a joint venture betwee n
Omnicom and Pegasus .
36. Communicade was the division of Omnicom that made investments in digita l
interactive companies, including Agency, Organic and Razorfish . During the class period ,
Omnicom spun off the Communicade assets into Seneca on May 2, 2001 .
37. Michael Tierney was the president of Omnicom's Communicade division from
October of 2000 until Communicade was tranferred to Seneca on May 2, 2001 . When Seneca was formed, Tierney was named its CEO . His office at Seneca is located within Omnicom' s
Madison Avenue headquarters in New York City.
38 . Gerry Neumann joined Omnicom in 1996 and was the ChiefFinancial Officer of
Omnicom's Communicade division until Communicade was transferred to Seneca on May 2 ,
2001 . When Seneca was formed, Neumann was named its Chief Financial Officer . His office at
Seneca is located within Omnicom's Madison Avenue headquarters in New York City.
39. Pegasus is a private equity fund founded and controlled by Craig Cogut, formerl y of Drexel Burnham Lambert Group Inc . Cogut is also the owner of Pegasus Investors, and th e senior founding principal of Pegasus Capital Advisors . Pegasus is located in Connecticut .
40. Jeffrey Rayport became a director of Agency in December of 1999 and was a member of a special committee of its Board of Directors of Agency formed in or about May o f
2001 to negotiate a purchase price for Agency on behalf of its shareholders with
Seneca/Omnicom . Rayport is a former Harvard Business School Professor and is also a faculty
13 member of Omnicom' s annual in-company university which promotes the professiona l
developement of Omnicom's executives. Rayport is also the CEO of Marketspace, LLC .
41 . Thomas Delong became a director of Agency in December of 1999 and was a member of a special committee of the Board of Directors of Agency formed in May of 2001 t o negotiate a purchase price for Agency on behalf of its shareholders with Seneca/Omnicom.
Delong is a Harvard Business School Professor and a former Chief Development Officer an d
Managing Director at Morgan Stanley . He is also a faculty member of Omnicom's in-compan y university.
IV. CLASS ACTION ALLEGATIONS
42 . Lead Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased o r otherwise acquired the securities of Omnicom on February 20, 2001 through and including June
11, 2002 (the "Class Period") and who were damaged thereby . Excluded from the Class are the
Individual Defendants, members of the immediate family of each of the Individual Defendants , the officers and directors of the Company or any of its subsidiaries or affiliates during the Clas s
Period, and any entity in which any defendant has or had a controlling interest, and the lega l representatives, heirs, successors or assigns of any of the excluded persons or entities specified in this paragraph.
43 . The members of the Class are so numerous that joinder of all members is imprac- ticable. Throughout the Class Period, Omnicom common shares were actively traded on th e
NYSE. As of the date of this Consolidated Complaint , there were approximately 188 millio n
14 shares of Omnicom common stock outstanding . While the exact number of Class members i s unknown to Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, Lead Plaintiffs believe that there are, at a minimum, thousands of members in th e proposed Class . Owners of record and other members of the Class may be identified fro m records maintained by Omnicom or its transfer agent, and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities clas s actions.
44. Lead Plaintiffs' claims are typical of the claims of the members of the Class as al l members of the Class are similarly affected by defendants' wrongful conduct in violation o f
Sections 10(b) and 20(a) of the Exchange Act .
45. Lead Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation .
Lead Plaintiffs have no interest antagonistic to or in conflict with the Class .
46. Common questions of law and fact exist as to all members of the Class an d predominate over any questions solely affecting individual members of the Class . Among the questions of law and fact common to the Class are :
(a) whether the federal securities laws were violated by defendants' acts as alleged herein;
(b) whether statements made by defendants to the investing public during th e
Class Period were false and misleading and misrepresented material facts about the business , operations and management of Omnicom ;
15 (c) whether defendants acted with scienter in issuing false and misleadin g statements during the Class Period;
(d) whether the Individual Defendants are liable as control persons under th e federal securities laws ;
(e) whether the market price of Omnicom's common stock during the Clas s
Period was artificially inflated because of the defendants' conduct complained of herein ; and
(f) whether the members of the Class have sustained damages and, if so, what i s the proper measure of damages .
47. A class action is superior to all other available methods for the fair and efficien t adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual class members may be relatively small, the expense an d burden of individual litigation make it impossible for members of the class to individuall y redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
V. SUBSTANTIVE ALLEGATION S
A. Company Background
48 . Omnicom is one of the world's largest advertising holding companies . After exponential growth in recent years, the company has grown its strategic holdings to over 1,50 0 subsidiary agencies operating in more than 100 countries . Omnicom's wholly and partiall y owned businesses provide communications services to clients on a national and international
16 basis. Omnicom's three largest subsidiaries are three of the world's large advertising agencies :
BBDO, DDB, and TBWA .
(i) Omnicom's Growth By Acquisition
49 . While the advertising industry was once characterized by small independent shops, over time there has been a trend toward consolidation and the industry is now dominated by three companies: Omnicom, Interpublic Group ("Interpublic"), and WPP Group PL C
("WPP"). Over the last several years, each of these companies has acquired scores of competi- tors in an effort to obtain a competitive advantage in the advertising industry .
50. During the Class Period, Omnicom' s business strategy was to grow its client base by acquiring smaller agencies for the purposes of, among other things, securing greater access t o its clients. Defendant Wren touted the so-called "selective acquisition strategy" at Omnicom , which he called the Harvard of holding companies , because like a highly selective college,
Omnicom would look at 100 candidates (for acquisition) a year but choose only a relative few .
(ii) Omnicom's Touted Year-Over-Year Growth of Revenue and Earning s
51 . By constantly acquiring companies, Omnicom was able to grow dramatically bot h prior to and during the Class Period . It touted this fact to investors in quarterly press releases and yearly reports that emphasized its record of year-over-year growth for dozens of consecutive quarters. For example, on February 20, 2001 (the start of the Class Period), in connection wit h the announcement of its fiscal year 2000 results, Onmicom stated that the fourth quarter of 200 0 marked its "38`'' consecutive quarter of year-over-year growth in revenue and earnings ."
17 52. In addition, by making these acquisitions, Omriicom was able to meet of excee d consensus Wall Street estimates for every quarter of the Class Period, as set forth below :
Reported Wall Street Consensus Period EPS Estimated EPS Q4 2000 $0.78 $0.76
Q1 2001 $0.52 $0.5 1
Q2 2001 $0.81 $0.8 1
Q3 2001 $0.50 $0.49
Q4 2001 $0.87 $0.87
Q1 2002 $0.68 $0.68
Q2 2002 $1 .00 $1 .00
53. The Company's incredible string of meeting or exceeding Wall Street estimates was touted by the Company and analysts alike . For example, Lehman Brothers reported in an
April 24, 2001 analyst report : "The company's reported revenue rose 16 .1% to $1 .60 billion, ahead of our forecast of $1 .58 billion. Organic revenue growth slowed some, but still remaine d at the high-end of management's formal guidance of 12-14% growth, allowing the company to post its 31st consecutive quarter of meeting or exceeding Street expectations . "
(iii) Omnicom's Reported "Organic Growth"
54. Despite Omnicom's impressive record of year-over-year revenue and earning s growth, throughout the Class Period Wall Street analysts and investors were skeptical o f companies whose growth was entirely dependent on new acquisitions. The reason for thi s skepticism was that growth by acquisition is inherently unsustainable . As the advertising industry continued to consolidate, and attractive independent agencies became scarce, it woul d
18 become more and more difficult for companies like Omnicom to find acquisition targets that would be able to add to their bottom lines. At some point, growth-by-acquisition would no longer be a viable option, and if a company were to continue to grow it would have to be able t o generate that growth from its existing operations. As an analyst for JP Morgan noted on Apri l
30, 2002, "We believe that investors will increasingly discount acquired growth, a strong sourc e of growth for OMC by any reckoning."
55. Moreover, throughout the Class Period, the advertising industry as a whole was experiencing sluggish growth. In this weakened marketplace, a company's growth from existin g operations was particularly meaningful, because it meant that the company was beating it s competitors in an adverse market .
56. In order to reassure analysts and investors that its reported growth was not drive n solely by acquisitions, Omnicom generated and published a measurement referred to as "organi c growth." "Organic growth" is a metric that is critical to investors in evaluating companies such as Omnicom, which generate much of their revenue and earnings through acquisitions . Organic growth is supposed to measure a company 's growth from existing operations , which are typically understood to include operations that have been owned by the Company for at least one year . As an analyst with Credit Suisse First Boston noted on October 23, 2001 , in the advertising industry, organic growth is the "key benchmark for many investors ." On September 17, 2001, Fortune magazine explained that Omnicom was "Rocking Through the Ad Recession," because although
"Omnicom is no longer the world's largest advertising company ... it is best in terms of organic growth (that is, growth before acquisitions, a key measure of success)." (Emphasis added).
19 57. Throughout the Class Period, the defendants touted Omnicom's organic growth rate, a fact that helped distinguish the Company from its competitors . In Omnicom's 2000
Annual Report to Shareholders, issued on March 31, 2001, Defendant Wren wrote: "Our company's 16.6% organic growth continued to outpace the market, whose overall advance last year was at a single-digit rate ." Indeed, throughout the Class Period, analysts continually focused on Omnicom's organic growth as a sign of its strength . For example, on July 24, 2001, Bear
Stearns issued an analyst report about Onmicom, in which it reported that "[o]rganic growth was within the range of the company's guidance at 12%, a very impressive number given the lackluster economic environment and relative to the mid single digit growth rates generated by its peers ."
58. As was revealed by The Wall Street Journal, Omnicom misled investors with respect to its organic growth throughout the Class Period by calculating that growth in a manner that was far more aggressive than any of its competitors and then comparing that figure to its
competitors as if it were comparing apples to apples . Specifically, as was finally admitted by
Omnicom in a Form 8-K filed on July 8, 2002, when Omnicom acquired a company, it
incorporated the growth of that company into its own organic growth figure the same year as the
acquisition. By contrast, Interpublic, one of Omnicom's major competitors against whom
Omnicom's performance was measured throughout the Class Period, waited a year after an
acquisition before including the acquired companies in their organic growth calculations .
59. By calculating organic growth in this manner, Omnicom effectively destroyed the
value of this measurement as it was understood by investors . For example, if the existing
20 businesses of Omnicom and Interpublic had both experienced zero growth during a particular year, and during that year both companies had purchased businesses that were growing ,
Interpublic would have reported a 0% organic growth rate, while Omnicom would have reporte d a positive organic growth rate, solely based on the impact of the newly-acquired companies .
60. Furthermore, overall growth is, by definition, the sum of organic growth and growth-by-acquisition . Thus, by overstating its organic growth, Omnicom understated the exten t to which its growth was dependent on acquisitions . This consequence was compounded by the fact that Omnicom's growth-by-acquisition came with other significant liabilities . Not surprisingly, Omnicom also withheld the nature and/or amount of these additional liabilities fro m investors.
(iv) Omnicom's Failure to Disclose Liabilities in Connection with Acquisitions
61 . Throughout the Class Period, Omnicom failed to disclose significant liabilitie s that it had undertaken in connection with its aggressive acquisitions strategy . Omnicom generally structured its acquisitions through earn-out agreements with the principals of it s acquired companies . These agreements required the principals to remain with the acquire d companies for a stated period of time in order to obtain the full benefit of the negotiated bargain .
The agreements required Omnicom to pay a relatively small amount up front, with the majority of compensation to be paid to the principals in "earn-outs" over three to five years after th e acquisition. These earn-outs generally were tied to revenue and earnings over that period , thereby providing incentives to the principals to remain productive.
62 . Omnicom's obligation to make earn-out payments represented a material liability
21 for the Company . As was ultimately admitted by the Company following the revelation of thi s fraud, as of July 2002, the liability associated with these earn-outs was nearly $400 million. (July
8, 2002 Investor Presentation.) The Defendants' failure to disclose this material liability durin g the Class Period misled investors into believing that Omnicom was more valuable than it actually was.
63 . Second, Omnicom failed to disclose that it had obligations to many of th e companies it had acquired to purchase additional equity, up to and including the remainder of th e acquired company's equity, at a later date. These "put" obligations represented a material liability for the Company. As was ultimately admitted by the Company following the revelatio n of this fraud, as of July 2, 2002, the liability associated with these obligations was approximatel y
$163 million. (July 8, 2002 Investor Presentation .) The Defendants' failure to disclose the material liability during the Class Period misled investors into believing that Omnicom was mor e valuable than it actually was.
B. Omnicom Jumps on the Dot-Com Bandwagon
64. By the end of 1996, Omnicom's strategy of growth-by-acquisition had expande d to include the acquisition of e-services companies in an effort to capitalize on the "dot-com" craze that had swept over the country . These investments were particularly risky in so far as companies such as Agency, Organic and Razorfish commanded top dollar, despite th e questionable underlying value of their business. Omnicom understood the risks associated with these investments, as is evidenced by defendant Wren's statements quoted in Fortune on
September 17, 2001, in which he explained that the gamble Omnicom was taking in thes e
22 internet companies was "akin to playing roulette."
65 . Nevertheless, at the time, the potential of internet consulting services looke d promising. According to a December 1, 1996, VARBusiness article:
Common sense supports the idea of many new companies starting up to provide Internet services . Just search the Web for "Internet consultant" or " Internet solutions" and you'll ring up thousands of hits, all from new companies . "A great deal of money is being spent on the Internet," says Clay Rider, analyst with Zona Research, Redwood City, Calif. "When chaos reigns, consultancy thrives ." And instant millionaires like Netscape's Mark Andreessen have encouraged others to take the plunge into new-age businesses .
66. On September 22, 1996, Omnicom announced that it had agreed to terms to acquire significant minority participation in five discrete interactive marketing agencies :
Razorfish; Think New Ideas, Inc . ; Agency; Interactive Solutions; and Red Sky Interactive . These businesses were organized in a newly created business unit at Omnicom called Communicade.
According to an article in PR Newswire on September 20, 2000, Communicade was established in 1996, as a
[K]ey strategic component of Omnicom Group's professional services portfolio and a long-term shareholder value building block . Communicade owns and manages investments in a group of market leaders involved in helping clients build their businesses in the digital economy and holds significant minority interests in a group of leading interactive media companies .... Communicade also provides assistance to other Omnicom Group units in the development of their digital strategies .
Communicade went on to invest in dozens of other companies, including Organic .
67 . On December 15, 1999, TheStreet.com captured the essence of Omnicom's foray into the dot-com world in an article titled "At Omnicom, an Ad Shop Turns Venture Capitalist ."
The article applauded Omnicom for "acting like a whip-smart strategic investor" and stated that :
"[t]hanks to the company's solid fundamentals - and, perhaps more importantly, its growing
23 portfolio of Internet service firm investments - Omnicom shares this year are up 72% ."
(Emphasis added.)
68. During the peak of the dot-corn craze in 1998 and 1999, companies in the e-services industry, such as those that Omnicom had acquired, were able to attract significan t venture capital and launch initial public offerings, thereby generating millions of dollars of proceeds . For example, Agency went public in December 1999, offering 6.8 million shares of common stock to the public at $26.00 per share. This offering, like many others at this time, was well-received, and shares of Agency's common stock traded up to over $90 per share shortly after the initial public offering . Following Agency's initial public offering, Omnicom owne d approximately 31 % of Agency's common stock, and, according to Omnicom's 1999 Form 10-K , it adjusted its carrying value based upon the IPO price . By May 2, 2001 (the date of Omnicom' s purported transfer of its shares to Seneca), Omnicom's interest in Agency was approximately
33 .5% of the outstanding common stock (excluding options).
69 . Similarly, Organic went public in February 2000, offering 6 .325 million shares of common stock to the public at $20 per share . According to Merrill Lynch, in a report dated Jun e
28, 2002, Omnicom adjusted its investment in Organic of approximately 17.3% of Organic common stock based upon the IPO price at that time . Shortly after the initial public offering
Organic's stock traded as high as $59 . At the time of the purported transfer of Organic from
Omnicom to Seneca, Omnicom continued to own approximately 17 .3% of Organic's stock .
70. Finally, Razorfish went public in April 1999, offering 3 .45 million shares of common stock to the public at $16 per share . Immediately after the initial public offerin g
24 Omnicom owned approximately 33% of Razorfish's stock, which it adjusted based upon the IP O price. (1999 Form 10-K at F-14) Later that year, Razorfish shares traded at prices above $100.
Following the IPO in 1999, Omnicom's ownership was reduced to 12% as a result of additional
shares issued by Razorfish. During the first quarter of 2000, Omnicom sold a portion of its
shares resulting in a pretax gain of $110 million .
C. The Internet Bubble Bursts
71 . In or about March 2000, the fortunes of internet companies generally took a sharp turn for the worse. The internet bubble effectively burst and, as a result, the business of internet services companies such as Agency, Organic and Razorfish dried up . As noted in an October 1 ,
2000 article in The Capital, "[fled up with aggressive spending on marketing and mounting losses from so many Web firms . . . the venture capital community . . . cut off funding." As a result, the cash-constrained dot-corns could no longer afford to purchase consulting services . The
Houston Chronicle reported on November 15, 2000 that "[t]he fallout [was] due to several factors. Many of the younger companies tended to take on any and all clients, with an emphasis on high-visibility dot-coms . Many of those customers sputtered after the tech-market downturn in April, or cut back sharply on capital spending ."
72. Indeed, as reported on April 17, 2000, by The Boston Globe, "[t]he market for
Internet-related stocks has tumbled 34 percent in a month, and last week's massive losses sen t shudders through the dot-corn world." Similarly, a November 20, 2000 article in Advertising Age reported:
"A year or two ago, all these interactive agencies were in the enviable position that they could turn away work," said Marissa Gluck, senior analyst at Jupite r
25 Research, a division of Jupiter Media Metrix . "These guys have to hustle now to bring on new clients, and now, just not dot-com clients . They're also under increased pressure that these clients are sustainable-not on a project basis ."
73 . The Advertising Age article goes on to say :
MarchFirst isn't alone . Beyond Interactive, Ann Arbor, Mich.; iXL, Atlanta ; Luminant Worldwide Corp., Dallas; and Razorfish., New York, have all had layoffs. Many of the biggest Web consultancies have stock prices under $5 .
"I think in general, we're seeing demand outstripping supply," said Richard Wise, North American practice leader for Mercer Management Consulting's e-commerce strategy group, adding that recently he's seen an overall "softness" in terms of proposals and rates. (Emphasis added.)
74. According to The New York Times, by September 11, 2000, "analysts ha d downgraded the stocks of about a third of the Internet consulting companies they cover , anticipating a period of retrenchment and ultimately, consolidation ." Organic was downgraded on September 7, 2000 by Thomas Weisel Partners.
75 . Similarly, according to a December 4, 2000 article in The New York Times :
The Internet consulting services industry is gasping for air -- notably MarchFirst, which forecast a fourth-quarter loss of perhaps US30 cents a share, instead of the US7 cents a share profit analysts had expected . The software companies are not exactly booming. And various hardware companies are tryin g to figure out what a slowdown in the telecommunications industry will mean to them .
Thomas Galvin, a Credit Suisse analyst, described the technology troubles as 'the cockroach theory -- where there is one, there is going to be a whole lot of them .' (Emphasis added.)
D. Omnicom's Investments Are Devastated
76. By the end of 2000, Omnicom's investments in e-services companies - all of which were held in Omnicom's Communicade subsidiary - were in serious distress . Indeed, according to Jack O'Dwyer's Newsletter of May 23, 2001, Omicom's internet investments, whic h
26 were once worth $2 billion plus, had declined to under $100 million . For example, as set forth more fully below, Agency, Organic and Razorfish (the e-services companies in which Omnicom had its largest investment), were each suffering from a severe downturn from which no one could reasonable believe they would recover.
77. For example, as set forth more fully below, Agency, organic and Razorfish (th e only companies for which there is publicly available information) were each suffering fro m severe downturns from which no one could reasonably believe they would recover . According to a former head of one of Organic's regional offices, who left the company in mid-December 2000, there was no way that management did not know the company was in dire straits. This former manager explained that this "industry-wide" problem was caused by rapid hiring which outpaced demand, and that the only solution was widespread layoffs and massive restructuring .
78 . As a result of the serious, other than temporary impairment that had been sustained by its e-services investments, Omnicom was required to write-down these investment s in accordance with GAAP. But rather than taking these write-downs and suffering the inevitable blow to its earnings that resulted from its losing investments, Omnicom perpetrated a scheme to move these losses off its books and maintain the facade of continued growth.
(i) Agency
79. By the end of fiscal 2000, Omnicom's investment in Agency had suffered significant, other than temporary impairment that had to be recognized by Omnicom i n accordance with GAAP .
80. According to Omnicom's 10-K for fiscal 1999 :
27 In December 1999, AGENCY.com Ltd (AGENCY), an affiliate of the Company, issued shares of its common stock in an initial public offering. The Company, through a wholly-owned subsidiary, owns 36% ofAGENCY's equity. Based on an offering price of $26 per share, an after tax gain of $17.6 million was recognized by the Company in shareholders' equity as a direct increase to additional paid-in capital. The Company accounts for its investment in AGENCY under the equity method. At December 31, 1999, the fair market value of the Company's investment in AGENCY was $944 million, which amount substantially exceeded its carrying value. (Emphasis added.)
81 . As detailed below, however, by December 31, 2000 the market value o f
Omnicom's investment in Agency had fallen to approximately $51 .2 million - a 95% drop in a single year :
Agency .com Market Value Analysis (In millions ) 3/31/2000 . 12/31/2000 3/31/200 1 Shares outstandin g 34.7 38.3 38.3 Total Market Capitalization $926.0 $153 $53 Omnicom's % ownership 35.0% 33.5% 33.5% Market value of Omnicom's % Ownership $324.1 $51.2 $17. 8
82 . By the end of 2000, Agency itself acknowledged that its business was in dir e straits. On December 14, 2000 Agency issued a press release announcing that it would "take steps to align capacity with [the] changing demand environment ." As detailed in the press release, these steps included closing one of its offices and laying off 190 employees, or over 10% of the company. Agency also announced that it would take a restructuring charge of between $11 and $14 million in the fourth quarter of 2000 . In other words, by the end of 2000, Agency executives had determined that the only way to save the company was to shrink it dramatically .
In a February 6, 2001 press release, the company announced that its net loss for the quarter ended
December 31, 2000 was over $9 million, versus a loss of only $39,000 the quarter before .
28 Defendant Wren was on the Board of Directors of Agency at the time of these announcements .
83 . Agency's difficulties grew even worse in the first quarter of 2001 . On May 14,
2001 -just days after the Seneca transaction - Agency announced another round of layoffs, thi s time of 350 employees, or approximately 25% of its remaining workforce . The company also announced that its net loss had increased yet again, to over $10 million for the quarter ende d
March 31, 2001 . Chan Suh, the chairman and CEO of Agency, acknowledged in this press release that "[t]his has been a difficult market for interactive services companies."
84. Several former employees have confirmed that in the first quarter of 2001, at th e latest, it was readily apparent that Agency was in dire straits . By the time Agency was losing customers and losing business, according to a former associate creative director, and spendin g much more money than it was taking in, according to a former account director . In fact, according to a former creative director with Agency, by January 2001, management's presentations at Agency' s "town meetings" with employees which were held on the cafeteri a level of the company, took on a desperate tone, with management telling employees that th e company was in dire straits, that there would be a tremendous amount of layoffs and tha t everyone needed to help develop business . A former Director of Sales and Marketing at Agenc y added that after the dot com market collapsed, Agency was "hemorrhaging cash ."
85 . Further, according to minutes dated May 31, 2001 of the special committee of th e
Board of Directors of Agency (just weeks after the Seneca transaction), these fair value decline s were far from temporary. For example, the minutes noted that, among other things, "th e
Company had revised its forecast for 2001 downward a number of times;" "Company's senior
29 management had no significant visibility into the Company's future results, particularly becaus e of the Company's lack of long-term contracts and the uncertainty and recent downturn in th e
Company's industry;" and "the Company has high fixed costs and expects its rate of cash usage to increase in the near future as its negative cash flow worsens ." In addition, Sarah E . Barnes, a
Salomon Smith Barney representative, noted that "in attempting to find an acquisition partner fo r the Company [Agency] . . . Salomon had contacted 82 potential candidates, but that the Company had received a definitive indication of interest only from Seneca."
86. Despite the precipitous, other than temporary drop in the value of Omnicom' s investment in Agency in fiscal 2000 and the first quarter of 2001, the defendants failed to take a charge to earnings in either of these periods, in violation of GAAP.
(ii) Organic
87. Similarly, by year-end 2000, Organic had suffered serious, other than temporary impairment that should have been recognized by Omnicom in accord ance with GAAP.
88. According to a former business development manager at Organic, in 2000 business at Organic was down approximately 50% . Similarly, a CNNfn correspondent reporte d on the September 7, 2000 episode of "Market Coverage " as follows:
Organic is looking negative down by 5/16, almost 6 percent at $5 a share . It's sending out a warning. This is an Internet consulting company, yet another one, that is reporting trouble . Several Internet consultants expect diminished business as the sector is seeing trouble . Will post a net loss for the quarter. The market consensus expectation had been for a profit . The revenues will be up 5 percent annually. Now Goldman Sachs has downgraded organic from market outperform to market perform . Thomas Weisel has cut it from buy to market perform and so has Donaldson Lufkin Jenrette . Donaldson cut its revenue and earnings forecast for organic for this year and next. They see three forces causing the problem. Deferred projects, the cancellation of some projects from dot- coms unable to fin d
30 funding as well as poor pipeline management and down this one goes off by 5/16 or 6 percent on the day.
89. Further, there was no sign that Organic's business prospects would get any better.
On December 12, 2000, The Los Angeles Times, reported:
"The list of Internet-related companies returning space to landlords or putting it up for sublease is long--and growing. . . . Internet consultant Organic Online Inc ., which has given 77,000 squarefeet back to its SoMa landlord . . .
90. On December 13, 2000 Organic acknowledged the futility of its situation , lowering its revenue and earnings expectations for the fourth quarter of 2000 and all of 2001 an d announcing a "restructuring of its business operations ." The company announced plans to lay off
270 employees, or approximately 25% of its global workforce, and close several of its offices .
The company also announced that its co-founder, Jonathan Nelson, was stepping down as CEO .
In the same announcement, Organic's CFO, Sue Field, acknowledged that "current marke t conditions have dictated that we make the difficult decision to streamline our operations in order to achieve profitability in 2001 ." Bruce Redditt, an Executive Vice President of Omnicom, wa s on the Board of Directors of Organic through this period .
91 . By December 31, 2000, Omnicom's investment in Organic's had fallen to approximately $12 million from $145 million, a 92% decline :
Organic Market Value Analysis (In millions) 6/30/2000 9/30/2000 12/31/2000 3/31/2001 Shares outstanding 87.0 88.0 88.5 88 .5 Total Market Capitalization $ 853.0 $395.9 $72.0 $44.3 Omnicom s % ownership 17.0% 17.0% 17.0% 17 .0% Market Value of Omnicom's % Ownership $145.010 $67.303 $12.2 $ 7.531
31 92 . Organic's troubles grew even worse in the first quarter of 2001 . On February8,
2001 Organic's new CEO, Mark Kingdon, acknowledged that the industry faced "substantia l revenue pressure" and that Organic's goal for the year was simply to become "cash flow positive." A month later, on March 29, 2001, the company announced that it was "restructuring " yet again, laying off an additional 300 employees, or 35% of its remaining workforce . The company also acknowledged that it was in danger of being de-listed by Nasdaq, because th e value of its shares had dropped below a dollar. Furthermore, in Organic's April 26, 2001 press release, it announced that revenues had decreased 42% from the fourth quarter of 2000 . For the year end 2000, Organic suffered a $86.3 million loss, and the company incurred a $46 millio n loss for just the first quarter of 2001 .
93 . Despite these facts, the defendants failed to take a charge to earnings with respect to the Company' s investment in Organic in either of these pe riods, in violation of GAAP.
(iii) Razorfish
94 . Finally, by year-end 2000, Omnicom's investment in Razorfish had suffere d serious, other than temporary impairment that should have been recognized by Omnicom in accordance with GAAP.
95. As early as October 2000 Razorfish had begun to issue cautionary statements t o investors. In a press release issued on October 24, 2000, Razorfish announced that it would begi n implementing a "performance improvement plan" in order to "[streamline] and [align] it s business to respond to the market . . . . "
96. On December 12, 2000 Razorfish issued a press release that revised the
32 company's performance estimates for the fourth quarter of 2000 . Jeff Dachis, Razorfish's CEO , stated that the reason for the downward revision was that "[t]he market for our services has changed dramatically and we underestimated the magnitude of this shift . As a result, w e overestimated . .. our performance expectations." (Emphasis added.)
97 . Razorfish issued a press release on February 5, 2001, which began to shed light o n the "performance improvement plan" announced the previous October. One of the chief components of the plan was a massive layoff of 400 employees, or over 20% of Razorfish's workforce. On February 8, 2001, Razorfish announced its financial results for the year ende d
December 31, 2000 and the need for such radical cost-cutting became clear. That day investors discovered that Razorfish had suffered a net loss of over $148 million during fiscal year 2000 , versus a net loss of $14 million during 1999 . Furthermore, for the first quarter 2001, Razorfis h incurred losses of $24 .9 million.
98 . By December 31, 2000, the value of Omnicom 's investment in Razorfish's had fallen to approximately $19 million from $944 million, a 99% decline :
Razorfish Market Value Analysis
(In millions) 12/31/1999 3/31/2000 12/31/2000 3/31/200 1
Shares outstanding 88.8 93.8 97.7 97.7 Total Market Capitalization $7,867.0 $2,579.2 $158.6 $42.8 Omnicom's % ownership 12.0% 12.0% 12.0% 12.0% Market Value of Omnicom's % Ownership $944.0 $309.48 $18.9 $5. 1
99. Despite these facts, Omnicom failed to take a charge to earnings with respect to it s investment in Razorfish in either of these pe riods, in violation of GAAP.
33 E. Omnicom Creates Seneca to Avoid Taking Losses and Write-Downs
100. Thus, by the end of 2000 and the first quarter of 2001, it was evident that the dot- com bubble had burst and Omnicom's e-services investments had gone bust . As a result, the
Company should have booked substantial losses and taken significant write-downs relating to those investments . But rather than properly account for these investments in accordance wit h
GAAP, the defendants chose instead to engage in improper accounting machinations so as t o remove these investments from their books without causing any negative impact to Omnicom' s bottom line.
101 . At or about this time, Omnicom's competitors that had pursued similar strategie s took write-downs with respect to similar investments that they had made during the "go-go 90's ."
For example, Interpublic had invested heavily in MarchFirst, a direct competitor of Agency ,
Organic and Razorfish . MarchFirst's stock was trading at over $80 per share at the end of 1999 , but by the end of the first quarter of 2001, the company was substantially impaired. Accordingly, in its quarterly report for the first quarter of 2001, Interpublic announced that it was taking a
$160.1 million charge "to recognize impairment in publicly-traded companies, including
MarchFirst ." Thereafter, as reported in Advertising Age on April 30, 2001 : "Wall Street moved quickly to punish Interpublic. Several analysts cut their earnings estimates for the year.
Interpublic stock dropped April 27; at mid-afternoon, it traded at $32.50, down 10% and near its
52-week low."
102 . In order to avoid the impact that the required write-downs in value and operatin g losses would have had on Omnicom's stock price (as detailed below), the defendants devised a
34 scheme to remove Omnicom's e-services investments from its books, without causing an y negative impact on Omnicom's earnings . Specifically, the defendants created a special purpos e entity, Seneca, and transferred Omnicom's interests in e-services companies, which at the time were held in Communicade, to Seneca plus an undisclosed sum of cash in return for preferred stock in Seneca. Omnicom then fraudulently valued the preferred stock at exactly the same amount as its carrying costs for the underlying e-services companies plus the cash contribution .
103. The defendants fraudulently accounted for this transaction as an outright sale of financial assets under SFAS 140, based on amounts that did not represent fair value, and thereby avoided reporting a loss, in violation of GAAP. Omnicom also violated GAAP by fraudulently accounting for its interest in Seneca on the cost basis, thereby subjecting it only to periodi c testing for impairment by the very defendants who devised this scheme in the first place .
104. Following the Seneca transaction, Omnicom negotiated additional transaction s whereby Seneca took private two of these same e-services companies, Agency and Organic, an d then Omnicom attempted to repurchase Agency and Organic from Seneca for the very sam e
Seneca preferred stock that it had initially received . As a result, when the scheme ran its course,
Omnicom would have divested itself of the majority of its e-services investments, without recording any loss, and would own 100% of Agency and Organic, both of which would be consolidated on its books.
105 . Thus, in sum, the defendants fraudulently utilized accounting machinations to shift its e-services investments, which were basically worthless by the end of 2000 and wer e producing significant operating losses, from an accounting treatment that required Omnicom t o
35 book significant losses and write-downs to one that was subject only to the judgment of the very
defendants that perpetrated this fraud.
(i) The Creation of Senec a
106. On April 2, 2001 -just days after Omnicom's filing of the 2000 Form 10-K which
contained false and misleading statements about its e-services investments (as set forth below) --
Omnicom announced its agreement with Pegasus to create Seneca . Seneca was actually formed one month later, on May 2, 2001 . Pegasus owned all of Seneca's common stock, and Omnico m received 8 .5% cumulative nonvoting preferred stock in Seneca having an average liquidatio n preference of $325 million in return for its contribution of Communicade, which consisted o f
Omnicom's investments in 16 e-services companies, including :
Company Source 33 .5% of Agency Seneca's Schedule 13D, filed 5/14/2001 17 .3% of Organic Seneca' s Schedule 13G, filed 5/14/2001 12% of Razorfish Seneca' s Schedule 13G, filed 5/14/200 1
(ii) Charges Avoided by Omnicom Through the Creation of Seneca
107. According to the June 21, 2002 issue of Campaign, the businesses that were transferred to Seneca - and, therefore, removed from Omnicom's bottom line - were "headed fo r accumulated losses exceeding $700 million." Because the majority of these companies were no t public, it is impossible to determine the exact amount of the charges that Omnicom avoided through the creation of Seneca. Nevertheless, the charges associated with Agency, Organic and
Razorfish are discussed below .
108. Agency. At December 31, 2000, Omnicom's investment in Agency was wort h approximately $51 million (see supra at 1179-86). This value was dramatically belo w
36 Omnicom's carrying value of its investment in Agency, which, was over $65 million .' However,
Omnicom improperly avoided writing down its investment in Agency, which would hav e resulted in approximately a $14 million charge against earnings . Had Omnicom taken this charge in the fourth quarter of 2000, as it was required to do under GAAP, it would have reduced earnings per share by $0.04 per share, resulting in the demise of its string of 37 consecutive quarters of year-over-year growth from operations and its missing Wall Street estimates.
109. Organic. At December 31, 2000, Onmicom's investment in Organic was wort h approximately $12 million (see supra at 1187-93). This value was dramatically belo w
Omnicom's carrying value of its investment in Organic , which, was well over $21 million.2
However, Omnicom improperly avoided writing down its investment in Organic, which woul d
'This allegation is based upon the public filings of Omnicom and Agency . According to Omnicom's 2001 10-K, it adjusted the carrying value of its Agency shares in connection with Agency's IPO. Based on Agency's $190 .7 million of total stockholders' equity as of December 31, 1999 reflected in its 1999 10-K (following its IPO) and Omnicom's 31% ownership interest, Omnicom's carrying value should have approximated $59 million as of that date . Following December 31, 1999, Omnicom's carrying value on the equity method would have included a reduction of approximately $5 million for its 33% of Agency's fiscal 2000 net loss of $14 .7 million and an increase of $11 .3 million for the price paid by Omnicom to exercise its option in 2000 to acquire an additional 2.2 million shares of Agency. The balance of the carrying value of approximately $65 million as of December 31, 2000 would have been further reduced by approximately $3 .5 million for Omnicom's 33% share of Agency's net loss of $10 .3 million for the quarter ended March 31, 2001, for a remaining carrying value of approximately $62 million .
'This allegation is based upon the public filings of Onmicom and Organic . According to the prospectus for Organic's IPO, filed on February 10, 2000, Omnicom had acquired 3,351,188 shares of Organic's series A preferred stock (converted to 10,053,864 common shares) for $10 million on January 29, 1997 and 1,488,000 series B preferred shares (converted on a one-for-one basis) for $10.7 million on February 7, 1999 . On February 10, 2000, Omnicom acquired an additional 2,249,076 shares of common stock for $7,000 through the exercise of warrants . Thus, in total, as of December 31, 2000 and May 2, 2001, Omnicom held approximately 17% of Organic's common stock at a total cost of approximately $21 million .
37 have resulted in approximately a $9 million charge against ea rnings in the fourth quarter of 2000.
Had Omnicom taken this charge in the fourth quarter of 2000, as it was required to do under
GAAP, it would have reduced earnings per share by $0 .03 per share, resulting in the demise of its
string of 37 consecutive quarters of year-over-year growth and its missing Wall Street estimates .
110. Razorfish. At December 31, 2000, Omnicom's investment in Razorfish was worth
approximately $19 million (see supra at 11 94-99). This value was dramatically below
Omnicom's carrying value of its investment in Razorfish, which, was over $30 million .3
However, Omnicom improperly avoided writing down its investment in Razorfish, which woul d
have resulted in approximately an $11 million charge against earnings . Had Omnicom taken this
charge in the fourth quarter of 2000, as it was required to do under GAAP, it would have reduced
earnings per share by $0 .03 per share, resulting in the demise of its string of 37 consecutiv e quarters of year-over-year growth and missing its Wall Street estimates.
3This allegation is based upon the public filings of Omnicom and Razorfish . According to Razorfish's registration statement dated January 22, 1999 and its prospectus dated April 26, 1999, Omnicom held approximately 3.4 million shares, or 37% of the 9,222,871 outstanding shares of Razorfish prior to its IPO . As disclosed in Onmicom's 2001 10-K, the Company adjusted the carrying amount of its investment Razorfish following the 1999 IPO by $8 .5 million (which represented a $5 .2 million after-tax gain) . This adjustment, together with Omnicom's initial investment of $167,000, its exercise of $22,100,000 worth of options, and the Spray Exchange valued at $1 .5 million, raised Omnicom's carrying value to $32,667,000 as of December 1999 . (This estimate likely understates Omnicom's true carrying value, however, because there is insufficient information to value Omnicom's purchase of an additional 2 .2 million shares of Razorfish in or around the first quarter of 1999 . A cost basis of $0 has been ascribed to those shares .) Thereafter, Omnicom sold an undisclosed number of shares in the first quarter of 2000 resulting a pre-tax gain of $110 million. Based upon the average market price of Razorfish's shares in that quarter, between 1 million and 2 million shares were sold, reducing Omnicom's carrying value by approximately $3 million. Thus, Omnicom's carrying value for its investment in Razorfish was approximately $30 million as of December 31, 2000, and May 2, 2001 .
38 111 . Indeed, the Omnicom defendant's failure to take a write-down in fiscal 200 0 related to Omnicom's investments in Agency, Organic, and Razorfish, resulted in a n approximate overstatement of after tax net income and fully diluted earning per share of over $20 million and $0 .11, respectively.
F. Omnicom Exercised Control Over Senec a
112. Despite the fact that the defendants wanted to unload its e-services investments to avoid the negative effects they would have had on Omnicom's bottom line, they always intende d to maintain control over Seneca and the Seneca entities .
113. As explained by Seneca's CEO, Michael Tierney, the former CFO of Communi- cade, in his sown testimony in the matter of Schneider v. Suh, Case No. 18889 (Del. Chancery
Ct. 2001) ("Tierney Dep ."), from the beginning, it was Omnicom's intention to consolidate it s holdings in the e-services industry by taking private its largest investments, and Seneca wa s merely a tool to accomplish Omnicom's goal. As Tierney explained, "We at Omni.com [sic] and Seneca we believe in broad space which means the market will rebound for services provided in the digital arena . The question is, how do we put together companies? How do w e invest in companies that can meet that demand to show clients they have a strong enough balanc e sheet to see the projects through, Et cetera." (Tierney Dep . at 22 (emphasis added).)
114. Tierney further explained that they urgency to consolidate .Omnicom's holdings was born of the fact that the "interactive arena got the brunt of the downturn market, so it wa s clear to us we had to start analyzing what would happen to each of these companies . We started looking into them very carefully including Agency, Razorfish at the time Organic Red Sky, othe r
39 companies to try to get a handle on, which were the companies . . . had a potential future around
what we might build some strong E services . . . ." (Tierney Dep . at 22)
115 . According to Tierney, Omnicom's takeover process began with "analysis of the
companies and Agency being one of our largest investments, our most prominent investment,
. . . . we spent a lot of time looking at it ." (Tierney Dep . at 22-23), (emphasis added) . In deciding
to take its major holding private, Tierney explained :
the decision arose as to whether to do something with it and if so, what to do . It clearly was going to require more cash one way or the other . It was probably going to require additional contribution of companies is we could to [sic] make it larger so that it would be a significantly sized company ."
And to do all of this when we only owned 40, 45 percent of it didn't make particular sense, so we came to the conclusion after this analysis if it were a company we wanted to start invest time and resources into, it made most sense to do it as a company that we owned 100percent ofand that's what led to the decision to acquire the shares. (Tierney Dep. at 23) (emphasis added) .
116 . For example, as set forth in a proxy statement filed with the SEC on October 3 ,
2001, by Agency, Seneca, Pegasus ("the Agency Proxy"), and a transaction statement filed with the SEC on the same date by Omnicom, all in connection with the subsequent "going private" transaction of Agency (discussed below), in early 2001, Agency began to explore the possibility of being acquired by another company. It claims to have contacted (through its investment bank,
Salomon Smith Barney) "83 companies or investment firms seeking to determine whether any of them would be interested in pursuing a possible investment, business combination or other strategic transaction with us." (Agency Proxy at 12 .) The proxy goes on to say that "except for
Omnicom. . . , none of them made any proposal for the acquisition of Agency or other strategic transaction or, in the opinion of our management, expressed serious interest in pursuing a
40 possible transaction ." Id.
117. After Omnicom made its proposal for the acquisition of Agency, but before
Omnicom issued its Annual Report filed with the SEC on Form 10-K ("Form 10-K") for the year ended December 31, 2000, defendant Wren informed Agency that it would be forming Senec a
"to hold certain of Omnicom's e-services investments," and that "if the new company wa s formed, he anticipated that the new company would desire to engage in substantive discussion s involving strategic transactions with [Agency]." (Agency Proxy at 13) Thus, it was clear from the beginning that the Seneca transaction was one of form - not substance - and that the "new company" would continue to pursue Omnicom's business strategy .
118. The formation of Seneca was misleading in that Seneca purported to be a n independent entity, when in reality, it was completely under Omnicom's control . Although defendant Wren indicated in The Wall Street Journal article of June 12, 2002, that the reason
Omnicom sought out Pegasus in forming Seneca was because Pegasus had an expertise at turning around failing companies, no one from Pegasus took a leadership role in Seneca. Rather,
Michael Tierney, the President of Onmicom's communication division, Communicade, was named the CEO of Seneca, and Gerald Neumann, CFO of Communicade, was named CFO o f
Seneca. Seneca's "corporate offices" were located within Omnicom's Madison Avenue headquarters. Seneca was entirely dependant on Omnicom for accounting systems, lega l assistance and personnel to conduct due diligence . (Tierney Dep. at 10). In addition, although
Tierney and Neumann are supposedly no longer with Omnicom, when one calls Omnicom and asks for either of them, Omnicom's receptionist connects you to their secretarie s
41 119. After the creation of Seneca, many of the Seneca entities continued effectively to be run by Omnicom, and according to several witnesses, their employees understood that
Omnicom remained in charge. Indeed, to the extent that they were even aware of Seneca' s formation, these employees understood that it was a shell company completely controlled b y
Omnicom. According to a former employee with knowledge of the relevant facts, Omnico m continued to be the final decision-maker on personnel decisions, and Omnicom continued t o receive regular monthly reports from all of these companies .
120. According to a former Vice-President of Technology at Agency, after the Senec a transaction, Michael Tierney told employees that things were going to stay exactly the same afte r the transfer. One of the only changes was that the monthly management reports which recapped the month's activities at Agency were to be addressed to Seneca, rather than Omnicom ; however,
Omnicom was still to receive copies of the documents .
121 . Another former Agency media planner revealed that Omnicom management ha d explained that the transfer of Agency to Seneca would be seen but not felt . Further, a former
Senior Vice-President at Agency indicated that in July 2001 - months after Agency was purportedly transferred to Seneca - Omnicom was still making decisions about which employee s would be laid off at Agency .
(i) Omnicom's Role in the Seneca Take-Over of Agenc y
122 . Omnicom's control over Seneca is further evidenced by the fact that following the creation of Seneca, and thus after Omnicom had supposedly transferred power over the forme r
Communicade companies to an independent third party, Omnicom, through defendants Wren an d
42 Weisenburger, was integrally involved in the negotiation of the "going private" transactions whereby Seneca purchased nearly all of the common shares of Agency .
123 . Indeed, Omnicom admitted being in control of Seneca by making certain SE C filings in connection with the Agency going private transaction . Specifically, Omnicom appeared as a filing person on the first amendment to Agency's Schedule 13E-3, filed o n
September 13, 2001 (the "Agency Proxy"). Pursuant to the General Instructions to Schedul e
13E-3, the only reason Onmicom would have to make such a filing was if it was a "person controlling the corporation," i.e., Seneca.
124. As described in the Agency Proxy :
Following the April 2, 2001 announcement of the formation of Seneca, executives of Omnicom, including Mr. Wren, Omnicom's chief executive office, approached Mr. Suh, Mr. Shannon and Mr. Trush with respect to preliminary discussions of basic concepts for Seneca's possible acquisition of the Agency common shares owned by certain management stockholders . The underlying concept being discussed was that Messrs. Sub, Shannon and Trush, and possibly other management stockholders, would sell their Agency shares to Seneca in exchange for an initial cash payment, with subsequent payments based on Agency's future terms for the possible earn-out structure which were eventually reflected in the share purchase agreement described below, including the timing of the payments to be made, the multiple of profit before tax to be used in calculating the earn-out payments and the structure for the initial payments to be made . As a result, the parties agreed that the terms discussed would be adjusted to accelerate the timing of certain of the earnout payments and the multiple of Agency's profits would be lower. These discussions were preliminary in nature and Messrs . Suh, Shannon and Trash were informed that there could necessarily be no agreement on the possible transaction until Seneca was formally organized.
125 . On May 12, 2001, Agency' s board was informed of Seneca's intention to buy shares from Agency's executives in an attempt to gain a controlling interest . (From the deposition of Jeffrey Rayport in Schneider v. Agency.com et al., September 25, 2001 ("Rayport
43 Dep.") at 66.) That day, Agency's board formed a special committee of independent directors to
evaluate the offer . The committee consisted of only Jeffrey Rayport ("Rayport") and Thoma s
DeLong ("DeLong"), because the remainder of the Board, including defendant Wren and a n
Omnicom Executive Vice President, Bruce Reddit, were not "independent ;" they were parties to
the transaction.
126 . No one from Pegasus was involved in negotiating the Agency transaction . When
Rayport was asked under oath who was present at the meeting discussing Seneca's offer to pur- chase Agency, he responded: "On the Omnicom or Seneca side we saw Michael Tierney, CE O of Seneca, a person by the name of Bob Profusek, an executive with Omnicom who was there a s an interested party. I believe we saw Gerry Neumann who was the chief financial officer o f
Seneca Investments, and then Tom Delong and I were also in attendance ." (Rayport Dep. at 80)
127. Similarly, in response to the question, "Who were the primary negotiators on behalf of the special committee and Seneca if there were any?" Rayport answered, "I think on the Seneca side clearly it was Tierney who was delivering the official statements and Bo b
Profusek who was providing commentary from their point of view ." (Rayport Dep. at 105)
Significantly, Rayport mentioned no one from Pegasus ; if Pegasus had truly been brought in to turn Agency around, certainly they would have been involved in this negotiation . Moreover, the facts that Omnicom officials were integrally involved, and that Agency perceived Seneca and
Omnicom as one in the same, demonstrate that the Seneca transaction was nothing more than a farce.
128 . Throughout the negotiation of the Agency transaction, defendant Wren did no t
44 attend or otherwise participate in Agency board meetings because of Omnicom's interest in the transaction. In fact, Weisenburger signed the proxy on behalf of Omnicom . Furthermore, a s documents and testimony establish, defendant Wren was integrally involved in negotiating th e
Seneca-Agency transaction . As reflected in the Agency Proxy :
At various times during the week of June 18`x', as well as in prior discussions, the special committee made several efforts to convince Seneca to increase the proposed price, including contacting Mr. Tierney on several occasions that week and Mr. Wren, on June 23rd. However, Seneca consistently expressed its opinion that it believed that is $3.00 per share proposal on May 14, 2001 was substantively and procedurally fair and that it had only indicated a willingness to consider enhancing the price to ensure a prompt resolution of the negotiations and the litigation. Mr. Wren referred the matter to Seneca, but also expressed his personal view that he did not expect that Seneca would increase the merger price beyond $3.35. (Agency Proxy at 17 (Emphasis added))
129. It was clear to Agency that defendant Wren, the CEO of Omnicom, had the fina l word with respect to this transaction. For that reason, at Rayport's prompting, Chan Suh,
Agency's CEO, called defendant Wren on June 12, 2001, to negotiate the deal price . According to Rayport, Mr. Chan "got to Wren very quickly and came very quickly back and called [me] up and said, you know, nothing doing here . Wren said no. And it was not phrased quite that politely." (Rayport Dep . at 110 (emphasis added .))
130. Further, according to Rayport:
[Tierney indicated] "I think we can go up to 3 .35, but that's it. And because we were still pushing for the 3 .50 mark as a nice round number and to our eyes $3 .35 still looked pretty weird, I said, Thank [sic] you very much, talked to counsel, and then subsequently DeLong and I contacted John Wren, the chairman and CEO of Omnicom essentially to say this company is more valuable than $3 .35. And it was in talking with John Wren which was on the evening of June 14 that it became absolutely clear that Tierney wasn 't going to budge and he certainly wasn't going to move if Wren was unwilling to move. And Wren made it very clear that Omnicom could just as soon walk away from this deal and do something
45 with a competitor at 25 cents instead of 3.35. (Rayport Dep . at 108) (Emphasis added .)
131 . The Special Committee also had "hard fought" negotiations with Wren. (Rayport
Dep . at 111-115.) Rayport recalled that Wren gave "lots of reasons why we should be happ y about the price where it was" . (Id. at 111) Wren drew a comparison to Organic and Razorfis h and "talked a lot about the market and a lot about the meltdown of the sector, but the real arguments were, you know, `I can go do this deal at 20 cents a share ."' (Id. at 112 .) Wren emphasized that Rayport should not "give him a good reason to do that." (Id. at 113 .)
132 . It was also clear to the Special Committee that the defendants always intended fo r
Omnicom to own Agency . Rayport recalled discussing with defendant Wren that "once [Agenc y was] owned by Omnicom [it] would have considerable enhancement value by dint of its privat e or closely-held status, by dint of its operating within an Omnicom environment that would giv e maximum leverage to Wren's benefit ...." (Rayport Dep. 115 (emphasis added .)) Furthermore, at the conclusion of this "rigorous process" of negotiating, Rayport concluded that "Omnicom is a smart company and was not interested in paying more than they need to pay for this ." (Rayport
Dep. at 108 (emphasis added .))
133. When asked about the process that Agency and Salomon Smith Barney (Agency' s investment banker) went through when evaluating potential buyers, Rayport stated : "my understanding is that this process looked at everyone but, . . . the best channel of communication with Omnicom/Seneca was going to be Wren to Suh, CEO to CEO, and that's in fact what ultimately happened ." (Rayport Dep. at 119-120 (emphasis added.))
(ii) Omnicom' s Role in Tender Offer of Organic Shares
46 134. Omnicom was also the primary player in dealing with the tender offer for
Organic's shares, which occurred on January 10, 2002 . In the proxy statement filed with the SEC on December 5, 2001 (the "Organic Proxy"), Omnicom admitted that its role in the Organic negotiations was nearly identical to its role in the Agency transaction .
135 . Indeed, as was the case with the Agency Proxy, Omnicom once again admitted being in control of Seneca by making certain SEC filings in connection with the Organic transaction. Specifically, Omnicom appeared as a filing person on the Shcedule TO, filed with the SEC on December 21, 2001 (the "Organic Proxy") . Pursuant to the General Instructions to
Schedule TO, the only reason Omnicom would have to make such a filing was if it was a "person controlling the corporation," i.e., Seneca.
136 . In early 2001, Defendants Wren and Weisenburger held discussions with
Organic's Chairman, Jonathan Nelson, to discuss "various transactions, including possible sales of all or a portion of Organic Holdings' (an entity which held the shares of Organic's executives) equity interest in Organic to Omnicom." (Organic Proxy at 10 .) Defendants Wren and
Weisenburger attended this meeting, along with various other Omnicom executives . (Organic
Proxy at 10 .) Thereafter, defendant Wren informed Mr . Nelson that "Omnicom was considering the formation of a new company to hold certain of its e-services investments, including the [the
Organic shares] owned by Omnicom," and that "the new company would desire to continue discussions involving possible transactions ." (Organic Proxy at 10 .)
137. Following the April 2, 2001 announcement of the formation of Seneca, defendants
Wren and Weisenburger engaged in further discussions with Organic to discuss Seneca's
47 possible acquisition of the shares it owned . (Organic Proxy at 10) "The underlying concept being
discussed was that [Organic] would sell Shares to Seneca in exchange for an initial cash
payment, with subsequent payments based on Organic's future results of operations." (Organic
Proxy at 10 .)
138 . According to the Organic Proxy, Seneca was formed by Pegasus, Omnicom and
Organic Holdings on May 2, 2001 . In connection with its formation, in addition to receiving all
of Omnicom's shares of Organic, Seneca acquired 4,365,000 Organic shares at a price of $0 .193 per share plus contingent rights to subsequent earn-out payments in a private transaction . After the transaction . Seneca owned 22.1% of Organic. (See Organic Proxy at 10.) Thereafter, between May and September 2001, the defendants and representatives of the parties met "on an intermittent basis.. . to discuss the terms of transaction." (Organic Proxy at 10 .)
139. Despite Omnicom's alleged passive status in Seneca, Omnicom representative s informed Organic Holdings that Seneca "might propose" to acquire the Organic shares not owned by Seneca or Organic Holdings if Organic Holdings was able to purchase a majority interest in Organic . (Organic Proxy at 11 .) On September 18, 2001, Seneca entered into a Shar e
Purchase Agreement to acquire a subsidiary of Organic Holdings, which held 58 .7% of the outstanding Organic shares. On December 4, 2001, Seneca's purchase of these shares was closed, resulting in Seneca owning 80 .9% of Organic. This transaction set the stage for Seneca to take Organic private by purchasing all of the remaining outstanding shares for $0 .33 per share beginning in December 2001 . (Organic Proxy at 11 .)
140. As was the case with the Agency transaction, there is no indication that Pegasu s
48 was involved in any of the negotiations or decisions regarding the Organic going privat e transaction. Further, in an agreement dated December 3, 2001 - one day before Seneca's purchase of shares closed - Organic granted to Omnicom an option to purchase 39,370,079 common share of Organic at $0.254. In granting this option, Organic permitted Omnicom to transfer it to Seneca or to any other of its direct or indirect subsidiaries . Accordingly, Omnicom itself was not only in control of the going private transaction, but also gained control of options , which, if exercised, amounted to 34.9% of the outstanding shares .
G. Revelation of the Frau d
141 . The instant fraud finally came to light on June 12, 2002, when The Wall Street
Journal published an article revealing the true nature of the Seneca transaction, as well as the additional elements of the defendants' fraudulent scheme - i.e., their failure to disclose thei r overly-aggressive calculation of organic growth and their failure to disclose material liabilitie s associated with their growth-by-acquisition strategy .
142. Once this information came to light, the price of Omnicom's common stock plummeted, dropping from $77.26 on June 11 to $50.94 on June 13 . As a result of this dramatic decline in value, Lead Plaintiffs and the Class suffered substantial damages .
VI. GAAP VIOLATION S
143 . Throughout the Class Period, the defendants represented that Omnicom' s financial statements were prepared in conformity with GAAP. However, in order to artificially inflate the price of Omnicom's stock, the defendants used improper accounting practices, in violation of GAAP, which had the effect of defrauding investors.
49 144. GAAP are recognized by the accounting profession and the SEC as the uniform
rules, conventions and procedures necessary to define accepted accounting practice at a particular
time. As set forth in Statement of Financial Accounting Concepts ("SFAC") No. 1, Objectives of
Financial Reporting by Business Enterp rises, one of the fundamental objectives of financial
reporting is that it provide accurate and reliable information concerning an entity's financial
performance during the period being presented. Paragraph 42 of SFAC No . 1 states:
Financial reporting should provide information about an enterprise's financial performance during a period . Investors and creditors often use information about the past to help in assessing the prospects of an enterprise . Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance .
145. The SEC requires that public companies file quarterly and annual financial statements that are prepared in conformity with GAAP . SEC Rule 4-01(a) of Regulation S-X states that "[fjinancial statements filed with the Commission which are not prepared in accordance with generally accepted accounting p rinciples will be presumed to be misleading or inaccurate." 17 C.F.R. §210.4-01(a)(1).
146. Management is responsible for prepa ring financial statements that conform with
GAAP. The AICPA Professional Standards provide :
The financial statements are management's responsibility . . . Management is responsible for adopting sound accounting policies and for establishing and maintaining internal controls that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements . The entity's transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management. . . . Thus, the fair presentation of financial statements in conformity with generally accepted accounting principles is an implicit and integralpart of management's responsibility . AU §
50 110.02 (1998) (emphasis added).
147. Furthermore, in preparing financial statements, management must comply with the following basic principles of GAAP :
(a)The principle that financial reporting should provide information that is useful t o present and potential investors in making rational investment decisions and that information should be comprehensible to those who have a reasonable understanding of business an d economic activities (FASB Statement of Concepts No . 1, ¶ 34);
(b)The principle of materiality, which provides that the omission or misstatement of a n item in a financial report is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon th e report would have been changed or influenced by the inclusion or correction of the item (FAS B
Statement of Concepts No . 2, ¶ 132) ;
(c)The principle that financial repo rting should provide information about how management of an enterprise has discharged its stewardship responsibility to owner s
(stockholders) for the use of enterprise resources entrusted to it . To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities fo r accountability to prospective investors and to the public in general . (FASB Statement o f
Concepts No. 1, ¶ 50);
(d)The principle that financial reporting should provide information about an enterprise' s financial performance during a period . Investors and creditors often use information about th e past to help in assessing the prospects of an enterprise . Thus, although investment and credi t
51 decisions reflect investors' expectations about future enterprise performance, those expectation s are commonly based at least partly on evaluations of past enterprise performance . (FASB
Statement of Concepts No . 1, ¶ 42);
(e)The principle that financial reporting should be reliable in that it represents what i t purports to represent . The notion that information should be reliable as well as relevant is centra l to accounting. FASB Statement of Concepts No. 2, It 58-59);
(f)The principle of completeness, which means that nothing is left out of the informatio n that may be necessary to ensure that it validly represents underlying events and conditions .
(FASB Statement of Concepts No . 2, ¶ 80);
(g)The principle that conservatism be used as a prudent reaction to uncertainty to try t o ensure that uncertainties and risks inherent in business situations are adequately considered . The best way to avoid injury to investors is to try to ensure that what is reported represents what i t purports to represent . (FASB Statement of Concepts No . 2, ¶¶ 95, 97); and
(h)The principle that contingencies that might result in gains are not reflected in account s since to do so might be to recognize revenue prior to its realization and that care should be use d to avoid misleading investors regarding the likelihood of realization of gain contingencies.
(SFAS No. 5, Accountingfor Contingencies) .
148 . As more particularly set forth below, Omnicom's financial statements throughout the Class'Period did not comply with GAAP.
A. Omnicom Violated GAAP By Failing to Write-Down Its Investments in the Seneca Entities in Fiscal 2000 and/or the First Quarter of 200 1
149 . As described above, by the end of fiscal 2000, the defendants knew or recklessl y
52 disregarded that Omnicom's investment in the Seneca entities had been seriously impaired, an d that the impairment was other than temporary. In view of this dramatic, other than temporary decline in value of these entities, Omnicom was obligated under GAAP to write-down these investments to fair value on Omnicom's balance sheet .
150. APB Opinion No . 18, The Equity Method ofAccounting for Investments in
Common Stock ("APB 18"), discusses two methods of accounting for investments in the commo n stock of another company. The "cost method" generally is used when a company owns less than
20% of and does not exercise significant influence over another company. The cost method requires that the investment be recorded at the company's cost, and that the recognition of the earnings by the investor be based solely on dividends received . Temporary increases or decreases in the value of the investment are not recorded on the income statement ; however, if the investment is a publicly-traded security, such temporary changes in market value are recorde d as unrealized gains or losses in the category of "other comprehensive income" on the company' s statement of shareholders' equity. On the other hand, a company is required to write-down a n investment that it accounts for under the cost method when there has been an "other tha n temporary impairment" in the value of the investment . APB 18 ¶ 6 (a) ("a series of operating losses of an investee or other factors may indicate that a decrease in value of the investment ha s occurred which is other than temporary and should accordingly be recognized") . Such a write- down reduces the company's income and earnings in the period in question .
151 . The second accounting model discussed in APB 18 is the "equity method ." As a general rule, the equity method is used when a company owns more than 20%, but less than 50 %
53 of another company, or if it exercises "significant influence" over the financial and operating
decisions of that company. The equity method also requires that the investment be recorded at cost. However, the equity method requires that the investor recognize its pro-rata share of profits or losses of the investee as an adjustment to its costs . As set forth in APB 18, "[t]he investment(s) in common stock should be shown in the balance sheet of an investor as a single amount, and the investor's share of earnings and losses of an investee(s) should ordinarily be shown on the income statement as a single amount...."
152 . Moreover, like the cost method, the equity method requires that when "[a] loss in value of an investment which is other than a temporary decline should be recognized the same as a loss in value of other long-term assets ." APB ¶ 19(h); see also SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities (with respect to investments in equity securities that have a readily determinable fair value and are not accounted for on the equity method, a decline in the market value of a security deemed to be non-temporary requires a company to write-down the cost basis of the security to fair value and to reflect the amount of th e write-down in earnings). APB 18 ¶ 19, provides further that "[e]vidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment ...."
153 . In terms of considering whether a decline is "other than temporary", Staff
Accounting Bulletin No . 59 ("SAB 59"), Accounting for Noncurrent Marketable Equity
54 Securities, specifies that declines in the value of investments in marketable securities caused b y
general market conditions or by specific information pertaining to an industry or an individua l
company, "require further investigation by management ." In this regard, SAB 59 states : "[a]cting
upon the premise that a write-down may be required, management should consider all availabl e
evidence to evaluate the realizable value of its investment ." Therefore, in conducting its investigation, management should consider the possibility that each decline may be other tha n temporary and reach its determination only after consideration of all available evidence relating to the realizable value of the security.
154. Moreover, SAB 59 makes clear that "other than temporary" does not mean permanent. Thus, the point at which management deems the decline to no longer be temporar y triggers the obligation to write-down the investment. This point may precede a determination that an investment is permanently impaired.
155 . GAAP also provides that an estimated loss from a loss contingency "shall be accrued by a charge to income" if. (i) information available prior to issuance of the financia l statements indicated that it is probable that an asset had been impaired or a liability had bee n incurred at the date of the financial statements ; and (ii) the amount of the loss can be reasonably estimated. SFAS No. 5, at ¶ 8. SFAS No. 5 also requires that financial statements disclose contingencies when it is at least reasonably possible (e .g., a greater than slight chance) that a los s may have been incurred . The disclosure shall indicate the nature of the contingency and shal l give an estimate of the possible loss, a range of loss or state that such an estimate cannot b e made.
55 156. Indeed, the SEC considers the disclosure of loss contingencies to be so impo rtant to an informed investment decision that it promulgated Regulation S-X, which provides that disclosures in interim period financial statements may be abbreviated and need not duplicate the disclosure contained in the most recent audited financial statements, except that "where material contingencies exist, disclosure of such matters shall be provided even though a significant change since year end may not have occurred." 17 C.F.R. § 210.10-01 . According to APB
Opinion No. 28, ¶ 17, Interim Financial Reporting:
The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they c an be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to inte rim periods so that the interim periods bear a reasonable portion of the anticipated annual amount.
157. Similarly, FASB Statement of Concepts No . 5 ("CONS") states, "[a]n expense or loss is recognized if it becomes evident that previously recognized future economic benefits of an asset have been reduced or eliminated.. . ."
158. Omnicom violated these provisions of GAAP by failing to write-down its investments in the Seneca entities du ring the year ended December 31, 2000, and in the first quarter of 2001 . As detailed above at ¶¶ 79 -99, by the close of fiscal 2000, Omnicom's invest- ment in the Communicade entities had suffered severe, other than temporary impairment.
Indeed, the Communicade entities had been forced to undergo extensive lay-offs and restruc- turing as result of the dot.com meltdown and were incurring significant increasing losses . They also suffered from a significant lack of visibility into future results and a lack of long-term contracts. Moreover, the uncertainty and dramatic downturn in the capital markets materiall y
56 impaired their ability to contribute to Omnicom's consolidated revenues and earnings .
159. As a result of these factors, no reasonable person acting in good faith could hav e determined that the decline in value of these assets was anything but non-temporary .
Accordingly, Omnicom should have taken write-downs with respect to the Seneca entities' as o f
December 31, 2000 by at least $14 million for Agency, $9 million for Organic, and $11 million for Razorfish. Omnicom's failure to write-down these investments made its financial statement s materially false and misleading.
B. Omnicom Violated GAAP By Failing to Record the Seneca Transaction at Fair Value
160. As set forth above, on or about May 2, 2001, the defendants transferred
Omnicom's interest in approximately 16 fledgling internet companies for the sole purpose o f removing those companies from Omnicom's books without taking the required write-down a s described above . In its 10-Q for the period ended June 30, 2001, Omnicom reported thi s transaction as follows :
In May 2001, the Company contributed to a new holding company investments in several companies, primarily in the e-services industry, and cash . Upon contribution, the investments were reclassified form long-term investments and investments in affiliates to cost basis investments and included in other assets in the accompanying balance sheet. No gain or loss was recognized on the transaction.
161 . In its 2001 Form 10-K, Omnicom represented that it had accounted for this transaction in accordance with GAAP, SFAS 140 . It further reported that no gain or loss was taken in connection with this transaction . According to Omnicom, the carrying value and fai r
' As set forth above, these are the only Seneca entities for which there is sufficient publicly available information to deduce the amounts of the write-downs .
57 value of its preferred stock, which it later revealed was $280 million, approximated the carrying
value of the Seneca entities as of the date of the transfer . If, however, the preferred stock was
valued at its fair value, Omnicom would have had to take a loss in connection with the transaction. The valuation ascribed to the preferred stock was knowingly false and misleading .
In fact, the fair value of the Seneca entities had fallen far below Omnicom's carrying value and, accordingly, Omnicom was obligated to take a loss in connection with the disposition of these assets based on their fair value.
162. Pursuant to APB 29, Accounting for Nonmonetary Transactions, a nonmonetary exchange is to be valued at the fair value of the asset surrendered in the exchange, unless the fair value of the asset received is more readily determinable . Here, the preferred stock received by
Omnicom in connection with the Seneca transaction was not publicly traded, and had no inherent value beyond the fair value of the entities and the cash that Omnicom contributed to Seneca .'
Thus, the exchange could only be valued at the fair value of the Seneca entities at the time of the transfer, plus, at most, $56 .8 million.
163. In determining the fair value of an asset surrendered in connection with a nonmonetary transaction, GAAP requires that a company look to the current market price of that asset, if that price is available . APB 29 states:
Fair value of a nonmonetary asset transferred to or from an enterprise in a
The Company did not disclose the amount of cash that it contributed to Seneca . However, its Statement of Cash Flows for the six months ended June 30, 2001, reveals a total of $56.8 million used in that period for "purchases of long-term investments and other assets ." Accordingly, the most Omnicom could have contributed was $56 .8 million. Nevertheless, it is extremely unlikely that all of the money went to Seneca .
58 nonmonetary transaction should be determined by referring to estimated realizable values in cash transactions of the same or similar assets, quoted market prices, independent appraisals, estimated fair values of assets or services received in exchange, and other available evidence . If one of the parties in a nonmonetary transaction could have elected to receive cash instead of the nonmonetary asset, the amount of cash that could have been received may be evidence of the fair value of the nonmonetary assets exchanged . (125 (emphasis added).)
164. Similarly, SFAS 140 , Accountingfor Transfers and Servicing Financial Assets and Extinguishments of Liabilities, states that:
The fair value of an asset (or liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basisfor the measurement, if available. If a quoted market price is available, the fair value is the product ofthe number of trading units times that market price. (¶ 68 (emphasis added) .)
165 . In addition, SFAS 140 states that, "[i]f quoted market prices are not available, the estimate of fair value shall be based on the best information available in the circumstances."
SFAS 140 also states that valuation techniques "shall incorporate assumptions that market participants would use in their estimates of values, future revenues, and future expenses , including assumptions about interest rates, default, prepayment, and volatility."
166. By the time of the Seneca transaction, the fair value of the Seneca entities ha d fallen far below Onmicom's carrying value . As set forth more particularly above at ¶¶ 79-99, th e market value of Omnicom's investment in Agency, Organic and Razorfish - the only Senec a entities for which there is publicly available information - had plummeted by $35 million, $1 2 million and $11 million, respectively . These amounts were far below Omnicom's carrying valu e for these investments, as evidenced by, among other things, Omnicom's admission in its 200 0
59 Form 10-K that the fair value of Agency had fallen below Omnicom's carrying value . (2000
Form 10-K at F-14.)
167. In view of the market for internet services companies generally at this time, a s discussed above, there is a strong inference that each of the other Seneca entities had suffered a similar decline. On June 12, 2002, Wren stated that "the bulk of the value [Omnicom' s investments that were transferred to Seneca] was in agency .com and Organic ." As a result, these entities, were the two largest single contributors of value to the Seneca deal . As Wren, stated
"[i]n addition to those two . . . relatively large assets, there's . . . a handful, six, seven, eight smaller either preferred or debt investments in . . . other much smaller businesses than those two are." Indeed, it is unlikely that any one of the 13 other internet companies, individually, coul d have exceeded a fair value of $8 million (Organic the smallest of the three entities had a fai r value of $9 million). As a result, Omnicom's accounting for the disposition of the Senec a entities violated GAAP because it was not accounted for at fair value . If this was a legitimat e transaction, Omnicom would have recorded the value of the preferred stock at no more than $21 6 million.
Omnicom's Contribution Fair Value as of 5/02/01 Agency $27 million Organic $9 million Razorfish $19.2 million Rest of the Seneca entities $104 million (13 x $8 million)6
6 This is the most that these companies could have been worth in view of the fact that Agency, Organic and Razorfish were the largest of Omnicom's investments that were transferred to Seneca. In all likelihood, this figure is significantly smaller, making the loss that Omnicom avoided through this transaction even more substantial .
60 Cash $56. 8 million' TOTAL $216 million
168. Defendants knew or recklessly disregarded that Omnicom should have taken a loss in the amount of the difference between its carrying value of approximately $280 millio n and the fair value of the Seneca entities, which would have been at least $64 million.
C. Omnicom Violated GAAP By Failing to Properly Account for Its Investment in Seneca
169. Following the Seneca transaction, Omnicom accounted for its investment i n
Seneca on the cost method, pursuant to which it would record income only to the extent that i t received dividends and would not recognize any share of the income or loss recognized b y
Seneca. (2Q 2001 Form 10-Q) This accounting treatment violated GAAP, for Omnicom was required to either consolidate Seneca's financial results with Omnicom's, or to account for it s investment in Seneca on the equity method.
170. To begin with, Omnicom accounted for the Seneca transaction pursuant to SFA S
140, Accountingfor Transfers and Servicing Financial Assets and Extinguishments of Liabilities .
In accounting for the transfer of financial assets and determining if such transfers represent a
"sale" in accordance with GAAP, SFAS 140 provides that:
A transfer of financial assets (or all or a portion of a financial asset) in which the transferor surrenders control over those financial assets shall be accounted for as a sale to the extent that consideration other than beneficial interests in th e transferred asset is received in exchange . The transferor has surrendered contro l
Omnicom's 2Q :01 statement of cash flows reflects $56 .8 million related to purchases of long-term investments and other assets . Plaintiffs have attributed the entire amount to the Seneca deal, for illustrative purposes . However, it is unlikely that the entire $56.8 million was used, if at all. (See n.4 supra.)
61 over transferred assets if and only if all of the following conditions are met : (1) The transferred assets have been isolated from the transferor (i .e., they are beyond the reach of the transferor and its creditors) ; (2) Each transferee has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both (a) constrains the transferee from taking advantage of its right to pledge or exchange and (b) provides more than a trivial benefit to the transferor ; and (3) The transferor does not maintain effective control over the transferred assets either through an agreement that obligates the transferor to repurchase or redeem the assets before their maturity or through the ability to unilaterally cause the holder to return specific assets . . . . (Emphasis added.)
171 . These conditions for the sale of assets apply to transfers to all types of entities ,
whether or not the transferees are special purpose entities ("SPEs"), such as Seneca . If the
transferee of financial assets is an SPE, there are additional criteria that must be satisfied in orde r
for the SPE not to be consolidated in the financial statements of the transferor of the assets .
Specifically, non-consolidation is only permissible when : (i) an independent third party is th e majority owner of the special purpose entity ; (ii) [the independent third-party exercises control over the special purpose entity] ; and (iii) the majority owner maintains the risks and rewards o f owning the special purpose entity! See also Topic D-14 Transactions Involving Special Purpos e
Entities, (nonconsolidation and sales recognition by the sponsor or transferor of assets (i.e. ,
Omnicom) are appropriate only if the majority owner of the SPE is (1) an independent thir d party; (2) who has made a substantive capital investment in the SPE ; (3) has control of the SPE ; and (4) has substantive risks and rewards of the assets .) If the special purpose entity does not meet all three of these "transfer of ownership" criteria, its financial results must be consolidate d
8See FASB Emerging Issues Task Force ("EITF") Bulletins : EITF Issue 90-15, Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions ; and EITF Topic D-14, Transactions involving Special-Purpose Entities .
62 with the true owner's results in order to comply with GAAP .
172. The transfer of Omnicom's investments in the Seneca entities failed the requirements of SFAS 140 for treatment as a sale. Specifically, ( a) the consideration received by
Omnicom consisted of a beneficial interest in Seneca; (b) control was not surrendered due to the special voting rights retained by Omnicom ; (c) as demonstrated above, Omnicom had effective control over the financial and operating decisions of Seneca; and (d) a substantial portion of the risks and rewards relating to the transferred assets remained with Omnicom in so far as th e recovery of its investment in the preferred stock was dependent upon the underlying cash flows of the Seneca entities . Consequently, the Seneca entities should have been retained on th e balance sheet of Omnicom through a consolidation of Seneca. Such treatment would hav e resulted in the realization of at least $58 million of losses ($35 million after tax) by Omnico m relating to the Seneca entities (see discussion supra at 1179-99) . These losses would have dramatically reduced Omnicom's earnings .
173 . Even if Omnicom did not "control" Seneca so as to require consolidation ,
Omnicom did exercise "significant influence" over the operations and financial policies o f
Seneca and the Seneca entities. In view of this significant influence, Omnicom was, at the ver y least, required under GAAP to account for its investment in Seneca pursu ant to the equity method. As a result, it still had to continue to record its share of the profits or losses of Seneca and the Seneca entities .
174. APB 18, paragraph 12, provides as follows :
The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial disclosures of the investee . The
63 investor then has a degree of responsibility for the return on its investment, and it is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee .
175 . APB 18 goes on to state in paragraph 17 that the "[a]bility to exercise ... influence may be indicated in several ways, such as representation on the board of directors, participation in policy making processes , material intercompany transactions, interchange of managerial personnel, or technological dependency." (Emphasis added .)
176 . Also, while Omnicom's publicly filed reports disclosed the existence of th e
Seneca transaction, these disclosures and the related accounting did not reveal the essence of th e transactions completely or clearly, and failed to convey the substance of what was going o n between Omnicom and Seneca . This was the result of an effort to avoid taking a write-down o n the Seneca entities and to disguise their substance and import . The disclosures also represente d that the transactions were reasonable compared to transactions with third parties when, in fact , they were not . Indeed, the true "substance" of these transactions was that Omnicom maintained control over the Seneca entities but improperly did not consolidate them or take a timely write- down on the Seneca entities . GAAP recognizes the importance of reporting transactions and events in accordance with their substance . For example, FASB Statement of Concepts No . 2 states, "[t]he quality of reliability and, in particular, of representational faithfulness, leaves n o room for accounting representations that subordinate substance to form ." Moreover, APB
Statement No . 4, Basic Concepts and Accounting Principles Underlying Financial Statements of
Business Enterprises, provides:
Financial accounting emphasizes the economic substance of events even though the legal form may differ from economic substance and suggest differen t
64 treatment. . . .
Usually the economic substance of events to be accounted for agrees with the legal form. Sometimes, however, substance and form differ. Accountants emphasize the substance of events rather than their form so that the information provided better reflects the economic activities presented .
177. As discussed above, Omnicom exercised significant influence over the busines s decisions of Seneca, such as negotiating the Agency and Organic going p rivate transactions .
Under such circumstances, it was a violation of GAAP for Omnicom to account for Seneca under the cost method. Had the defendants properly accounted for Seneca, Omnicom would not hav e been able to continue to meet analysts' estimates or to report continued growth from operations .
D. The Defendants Violated GAAP By Failing to Disclose Liabilities Relating to Omnicom's Acquisition
178. Omnicom failed to disclose future earn-out commitments and contingen t obligations to make additional investments in certain partially acquired companies, i n contravention of GAAP and SEC requirements .
179. GAAP and SEC standards require disclosure concerning a Company's obligations and commitments to make future payments under contracts, such as debt and lease agreements , and under other contingent commitments . Pursuant to Instruction 3 to Item 303(a) of SE C
Regulation S-K, the MD&A "shall focus specifically on material events and uncertainties know n to management that would cause reported financial information not to be necessarily indicativ e of future operating results or financial condition," inter alia, "matters that would have a futur e impact on future operations and have not had an impact in the past . . . ." Further, SEC Regulation
S-X governing the form and content of financial statements provides for the disclosure of
65 commitments and contingencies as a separate caption on the balance sheet .
180. In addition, SFAS No. 5, requires disclosures of material commitments or obligations. It also is clear that "[t]he disclosures shall include the nature and the amount of the guarantee." (Emphasis added.)
181 . According to a Financial Times article published after the Class Period on Jun e
13, 2002, "Omnicom relied on the strength of its acquisition muscle to grow into an advertising powerhouse. Doubts over how those deals were accounted for were fueled when the head of th e company's audit committee, Robert Callander, resigned ." Many of these acquisitions were earn- out deals, in which part of the purchase price was paid in performance-related installments ove r three to five years .
182. In this regard, defendants belatedly disclosed in a conference call on June 12 ,
2002 the following :
ALEXIA: . .. I just wanted to ask some questions on the earn-outs . Specifically there have been questions about what your outstanding liabilities associated to previously made acquisitions are, if you can quantify the outstanding liabilities for earn-outs are?
RANDALL WEISENBURGER: Okay. We've done some estimates on it . First thing to keep in mind with the earn-outs, they are based upon the perform ance of the companies during the earn-out pe riods. So they can, you know, go up, they can go down.
What we tried to do, to answer this question, is go through with all of the existing acquisitions or earn-outs that are outstanding, and say if those companies remained at their current operating levels, how much additional --- how many additional payments, or how much additional payments would be required? As of June 1st, we estimated that number to be between $250 and $350 million out, you know, through 2005, basically through any of the earn-out periods that are out there. Now, in addition to those payments, we have already made, in 2002, probably $100 million, roughly, of payments. So as of year-end, that estimate
66 was probably $350 to $450 million, But, again, we are very hopeful that the earn- outs are higher than that. The better the companies perform, the better off we all are. (Emphasis added.)
183 . Indeed, with such a high volume of acquisitions, 73 in 2000 and 2001 alone ,
Omnicom's obligations to make future earn-out payments amounted to a material potentia l liability, equivalent to roughly 10%, or more, of Omnicom's net debt .
184. Similarly, the June 12, 2002, Wall Street Journal article that precipitated that conference call revealed that "The [C]ompany has another potential future liability that it isn't required to report : agreements to purchase outright companies in which it has invested . Omnicom says it has stakes of less than 50% in 111 companies over which it has a measure of influence .
Some of these so-called equity affiliates have a right, under certain circumstances, to be bough t in their entirety by Omnicom . The holding company doesn't disclose which or how many affiliates have such a right."
185 . APB Opinion 16, Business Combinations, provides that the notes to the financial statements of an acquiring corporation should disclose, for the period in which a busines s combination occurs, contingent payments, options, or commitments specified in the acquisition agreement and their proposed accounting treatment . (¶ 95(f))
186 . The Company's failure to disclose these future obligations associated with it s strategy of growth by acquisition violated GAAP.
E. The Defendants Violated SEC Rules By Failing to Disclose Known Trends and Uncertainties
187. Item 7 of Form 10-K and Item 2 of Form 10-Q, require that companies furnish the information required by Item 303 of Regulation S-K, Management's Discussion and Analysis o f
67 Financial Condition and Results of Operations ("MD&A") [17 C.F.R. 229.303] . In discussing results of operations, Item 303 of Regulation S-K, requires companies to : "[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a mate rial favorable or unfavorable impact on net sales or revenues or income from continuing operations ."
The Instructions to Paragraph 303(a) fu rther state: "[t]he discussion and analysis shall focus specifically on mate rial events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results. . .."
188. In addition, the SEC, in its May 18, 1989 Interpretive Release No . 34-2683 1 , indicated that registrants should employ the following two-step analysis in determining when a known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Ite m
303 of Regulation S-K: "A disclosure duty exists where a trend, demand, commitment, event o r uncertainty is both presently known to management and is reasonably likely to have a materia l effect on the registrant's financial condition or results of operations ."
189. The MD&A requirements are intended to provide, in one section of a filing , material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future . As Securities Act Release No. 6711 states:
The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance . MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. . . .
68 190. Sec. 229.303 (Item 303), Management's discussion and analysis of financia l condition and results of operations, states: "[t]o the extent that the financial statements disclos e material increases in net sales or revenues, provide a narrative discussion of the extent to whic h such increases are attributable to increases in prices or to increases in the volume or amount o f goods or services being sold or to the introduction of new products or services ." Similarly,
Securities Act Release No. 6349, n.5, at 964 makes it "the responsibility of management t o identify and address those key variables and other qualitative and quantitative factors which ar e peculiar to and necessary for an understanding and evaluation of the individual company."
191 . Omnicom's violated these provisions in so far as it (i) failed to disclose th e increases in earnings during the Class Period were overstated as the result of its failure to write- down its investments in, and losses related to, the Seneca entities ; (ii) failed to disclose its future earn-out commitments; and (iii) failed to disclose its contingent obligations to make additiona l investments in certain partially acquired companies . Each of these factors was reasonably likel y to have a material effect on Omnicom's operating results and was necessary for investors to hav e a proper understanding of the Company's operating performance and an informed investment decision.
VII. FALSE AND MISLEADING STATEMENT S
192. Throughout the Class Period, defendants engaged in an ongoing scheme to inflat e the price of Omnicom by making a series of materially false and misleading statements about th e
Company's business, performance, and prospects .
A. Omnicom's Fiscal Year 2000 Results
69 193. The Class Period begins on February 20, 2001 . On that day, Omnicom issued a press release announcing its financial results for the fourth quarter of 2000 and full year 2000, the periods ending December 31, 2000. The Company reported that net income for the fourth quarter of 2000 increased 19% to $142 .2 million from $119 .9 million in the fourth quarter o f
1999 . Worldwide revenues increased 20% to $1 .802 billion in the fourth quarter of 2000 fro m
$1 .502 billion in the fourth quarter of 1999 . The Company also reported that net income for th e twelve months ended December 31, 2000 increased 37% to $498 .8 million from $362.8 million in 1999, and worldwide revenues for the twelve-month period increased 20% to $6.154 billion in
2000 from $5.130 billion in 1999 .
194. Also on February 20, 2001, Omnicom held a conference call to discuss its financial results for the fourth quarter of 2000 . During the conference call Defendant Wre n touted the Company's performance over the previous year :
For most of you have had the opportunity now to read the press release you'll hopefully agree that the year 2000 was a terrific year for Omnicom and all of its subsidiaries. Performance . . . is really supported by the new business that we were able to win last year, continuing efforts of all our subsidiaries throughout the world and last year was a challenge and this year again it will be another challenge but I think our organization is certainly up to it .
Defendant Weisenburger touted the Company's growth in the conference call :
To begin with we're happy to say the fourth quarter was Omnicom's 38th consecutive quarter of year over year growth in both revenue and earnings . . . . Included in that full year set of numbers is $110 million pre-tax profit and the $63.8 million after tax profit related to the sale of about 4 million shares of Razorfish which was approximately 25% of our original position . That sale occurred in the first quarter. Obviously we're pretty happy having completed that sale and while we continue to have assets on our balance sheet related to various dot com investments, including Razorfish, largely due to that sale our net economic position and the dot corns that we've invested in is basically zero . . . .
70 Organic growth for the quarter driven by strong net new business wins is exceptionally strong at 16.9%. The strong performance in the quarter tops off a very good year bringing organic growth for the year up to 16.6% . . . . Year to date total growth in the U.S. was 28 .6% with acquisitions contributing 10 .7% of that growth and organic growth again driven by very strong new business wins and a strong overall market was 17 .9%. Internationally, organic growth in the quarter was a very solid 13.6% and acquisitions added an additional 5 .2% growth.... For the full year, international organic growth was 15 .4% and acquisitions added an additional 7 .1%. (Emphasis added.)
195. Defendants knew or recklessly disregarded that the statements contained i n
IT 193-194 related to Omnicom's results for fiscal year 2000 and the fourth quarter of 2000 were materially false and misleading when made, and were made without a reasonable basis, becaus e they misrepresented and/or omitted the following adverse facts discussed in detail above, tha t then-existed, the disclosure of which was necessary to make the statements made not materiall y misleading:
(a) As set forth in ¶¶ 76-105, 149-159 above, the Company's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities despite the fact that the severe impairments associated with such investments could no longer be considered temporary; "
(b) As set forth in IT 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requi ring the company, under certain circumstances, to make mate rial additional investments, totalling at least $163 million to partially acquired companies ;
(c) As set forth in 1161-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million ;
(d) As set forth in IT 54-60, 248-250 above, the Company's statements
71 describing its organic growth were false and misleading because Omnicom included the results of just-acquired companies in these figures ;
(e) Defendant Weisenburger's statement that Omnicom's performance in the quarter was "strong" was false because the Company's internet investments were devastated, as described in 11 54-60, 76-105, 248-250 above, and because the Company's organic growth figures were inflated ; and
(f) Defendants failed to disclose that fiscal year 2000 and fourth quarter 2000 results were met only because they engaged in the GAAP violations discussed above.
196 . In response to the press release and conference call contained in IT 193-194 above, the share price of Omnicom closed at $94 .51 on February 20, 2001, a one day increase of
$5 .76.
197. Furthermore, it was clear that Omnicom's representations about the Company' s growth were of significant importance to the marketplace . On February 28, 2001, a Salomo n
Smith Barney analyst issued a report on Omnicom entitled, "Strong and Resilient." In the report, the analyst wrote that:
Overall, fourth quarter results were very strong and confirm very solid fundamentals . Organic revenue growth in the quarter was 16.9%... . New business momentum showed continue d improvement in the fourth quarter (suggestive of a strong backlog) and OMC has booked about $1 billion in net new business in the first quarter to date.
* *
[R]ecent and continued new business strength is a key source of Omnicom's good growth visibility (we estimate that new business alone from 2000 should add about 11 % to Omnicom's growth rate in 2001). As we watch more and more companies miss earnings, we place a higher value on the security of numbers at OMC. We believe the stock will outperform the market and its peer grou p
72 over coming quarters. We also believe stock out performance lies ahead as OMC's relative growth rate versus other media companies and the S&P 500 should expand over coming quarters. (Emphasis added)
198. On March 27, 2001, Omnicom filed with the SEC on Form 10-K its financia l results for the year ended December 31, 2000. Defendants Wren, Weisenburger, Crawford, an d
Angelastro signed the Form 10-K. The Form 10-K disclosed the following :
Operating margin, which excludes net interest expense, improved to 14.3% as compared to 14 .1% in 1999, reflecting improved operating leverage and continued emphasis on cost controls and corporate purchasing efficiencies . Additionally, we sold a portion of our investment in Razorfish, Inc . in the first quarter of 2000, resulting in a $110.0 million pretax gain ($63 .8 million after tax). Excluding the Razorfish gain, our pretax margin for the year 2000 was 13.0% compared to 13 .1 % in 1999.
Including the gain on sale of Razorfish shares, our consolidated net income increased 37 .5% to $498 .8 million from $362 .9 million in 1999 and our diluted earnings per share increased 35 .8% to $2.73 . Excluding the Razorfish gain, our net income increased 19.9% to $435 million and our diluted EPS increased 19 .4% to $2.40. The effect of translation of foreign currency to the US dollar on diluted EPS was a decrease of $0 .10 per share.
199. Moreover, defendants made the following statements relating to investments in
Form 10-K:
Long-term investments in public companies, which are comprised of minority ownership interests in certain public marketing and corporate communications services companies where the Company does not exercise significant influence over the operating and financial policies of the investee. The Company accounts for these investments under the cost method. The original cost of these investments is adjusted and they are recorded on the balance sheet, in long-term investments, at market value, with any
73 unrealized gains or losses recorded to comprehensive income. The Company periodically evaluates these investments to determine if there have been any non -temporary declines in value. A variety of factors are considered when determining if a decline in market value below book value is non-temporary, including, among other things, the financial condition and prospects of the investee, as well as the Company's investment intent. Long-term investments in private companies are primarily comprised of preferred equity interests in non -public marketing and corporate communications services companies where the Company does not exercise significant influence over the operating and financial policies of the investee. These minority interests are accounted for under the cost method and are included in other assets. These investments are periodically evaluated to determine if there have been any non-temporary declines below book value. A variety of factors are considered when determining if a decline in fair value below book value is non-temporary, including among other things, the preference position of our interest, the financial condition and prospects of the investee, as well as the Company's investment intent .
The intangible values associated with the Company's business consist predominantly of the value of the Company's existing worldwide agency networks and agency brands and the value of th e Company's existing ongoing client relationships . Intangibles are amortized on a straight-line basis over a period not to exceed 40 years. The intangibles are written down if, and to the extent, they are determined to be impaired . Intangibles are considered to be impaired if the future anticipated undiscounted cash flows arising from the use of the intangibles is less than the net unamortized cost of the intangibles. The Company's worldwide agency networks have been operating for an average of over 60 years. Client relationships in the corporate communications services industry are typically long-term in nature and the Company's largest clients have on average been clients for more than 30 years . From time to time the Company makes acquisitions consistent with its strategy of enhancing the value of its worldwide agency networks and brands and enhancing and expanding its current ongoing client relationships. The intangibles that result from these acquisitions represent acquisition costs in excess of fair value of tangible net assets acquired and consist primarily of the know-how, reputation ,
74 experience and-geographic location of the purchased businesses . (Emphasis added)
200. Defendants knew or recklessly disregarded that the statements contained i n
¶¶ 194-196 above were materially false and misleading when made, and were made without a reasonable basis, because at the time they were made defendants knew or recklessly disregarde d that:
(a) As set forth in ¶¶ 76-105, 149-159 above, the Company' s operating margin was inflated and had not improved to 14.3% because, in contravention of GAAP and applicable accounting standards , defendants improperly failed to take losses on and to w rite-down Omnicom's investments in the Communicade entities despite the fact that the severe impairments associated with such investments could no longer b e considered temporary;
(b) That contrary to the statement made in the 10-K, the Company failed to evaluate its investments to determine if there had been non-temporary diminutions in value as set forth in IT 76-105, 149-159 above ;
(c) As set forth in ¶¶ 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(d) As set forth in 1161-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million; and
(e) Defendants failed to disclose that fiscal year 2000 results were met only because they engaged in the GAAP violations discussed above .
201 . In April 2001, defendant Wren sent a letter to Omnicom shareholders which wa s filed with the SEC that reviewed fiscal year 2000 . In the letter, Wren wrote, in pertinent part :
75 I am pleased to report that it was our 14" consecutive year of record breaking financial results . The fourth quarter was Omnicom's 38`h quarter in a row of year- over-year gains in revenue and earnings . Our company's 16 .6% organic growth continued to outpace the market, whose overall advance last year was at a single- digit rate.
Worldwide revenue increased 20% to $6 .2 billion in 2000, from $5.1 billion in 1999 . Domestic revenues increased 29% to $3 .3 billion, compared with $2 .5 billion in 1999 . We reported international revenues for the twelve months of $2 .9 billion, an 11 % increase from the $2 .6 billion in 1999. The growth of our international business in dollar terms was cut nearly in half by currency translation effects.
Net income increased 37% last year, to $ 498 .8 million up from $362.9 million in 1999. Diluted earnings per share gained 36%, reaching $2 .73 per share in 2000, an advance from the $2 .01 per share earned in 1999 . This includes a pre-tax realized gain of $110 .0 million ($63 .8 million after-tax) on the sale of a portion of the company's ownership position in Razorfish. Excluding the Razorfish gain, net income for the twelve months increased 20% year-over-year to $435 million and diluted earnings per share increased 19% to $2 .40 per share.
Our operating margin widened to 14.3%, compared to 14 .1% in 1999.
[D]espite the weakening economic environment in the United States, 2000 was an outstanding year for our company . We continued to perform well across all of our operating divisions. Our strategically balanced advertising and marketing services portfolio and diverse geographic reach allow us to continue to increase ou r services to existing clients and win new accounts . Our sound financial position and strong balance sheet provide a solid foundation for our ongoing operations, and serve as a base for our expansion .
202 . Defendants knew or recklessly disregarded that the statements contained in ¶ 20 1 above were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in detai l above, that then-existed, the disclosure of which was necessary to make the statements made no t
76 materially misleading :
(a) As set forth in ¶¶ 76-105 , 149-159 above, the Company' s reported earnings, operating margin, and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(b) As set forth in ¶¶ 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(c) As set forth in 1161-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(d) As set forth in ¶¶ 54-60, 248-250 above, the Company' s statements describing its organic growth were false and misleading because Omnicom included the results ofjust-acquired companies in these figures ;
(e) Defendant Wren's statements that Omnicom performed "well" in the quarter was false because the Company's internet investments were devastated as set forth in ¶¶ 76-105, 149-159 above ; and
(f) Defendants failed to disclose that fiscal year 2000 results were met only because they engaged in the GAAP violations discussed above .
B. Omnicom's First Quarter Fiscal Year 2001 Result s
203 . On April 24, 2001, Omnicom issued a press release announcing its financia l results for the first quarter of 2001, the period ending March 31, 2001 . The Company reported that net income for the first quarter of 2001 increased 20% to $95 .3 million from $79 .7 million in the first quarter of 2000. The Company also reported that worldwide revenue increased 16% to
77 $1 .601 billion in the first quarter of 2001 from $1 .379 billion in the first quarter of 2000.
204. Also on April 24, 2001, Onmicom held a conference call to discuss its financia l results for the first quarter of 2001 . During the conference call Defendant Wren touted th e
Company's performance in the quarter:
The business environment in the first quarter was challenging, as it was I guess for many of our clients and others, but we feel that all of our business units actually performed very well in th e environment. It's a testament to the balance I think that we've built in the company that we have the right services in the right environments and we're able to adjust our businesses to face the current environment that we're in.
Defendant Weisenburger touted the Company's growth in the conference call :
To begin, revenue for quarter increased $222 million to $1 .601 billion. That was an increase of 16% over last year . And net income increased 20% to 95 .3 million, making this quarter Omnicom's 39th consecutive quarter of year-over-year growth in both revenue and earnings.
[O]rganic growth for the quarter was driven largely by last year's strong net new business lends. It came in at 13.8%. (Emphasis added.)
In the United States total revenue growth was 25% of which our organic growth, again driven by strong new business wins, was 14.8% and 10 .2% was the result of acquisitions. Overseas organic growth was also very strong, coming in at 12 .6%. Acquisitions added an additional 2 .8%.
205. The statements contained in 11 203-204 above were materially false and misleading when made, and were made without a reasonable basis, because they misrepresente d and/or omitted the following adverse facts discussed in detail above, that then-existed, th e disclosure of which was necessary to make the statements made not materially misleading :
78 (a) As set forth in ¶76-105, 149-159 above, the Company's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities despite the fact that the severe impairments associated with such investments could no longer be considered temporary ;
(b) As set forth in IT 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Onmicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(c) As set forth in IN 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(d) As set forth in ¶¶54-60, 248-250 above, the Company' s statements describing its organic growth were false and misleading because Omnicom included the results of just-acquired companies in these figures ; and
(e) As set forth in ¶¶ 76-105, 149-159 above, Defendant Wren's statements that Omnicom performed "very well" in the quarter was false because the Company's internet investments were devastated and its organic growth rate was inflated .
(f) Defendants failed to disclose that first quarter 2001 results were met only because they engaged in the GAAP violations discussed above .
206. In response to the press release and Defendants' statements on the conference call set forth at ¶¶ 203-204 above, the share price of Omnicom closed at $89 .20 on April 24, 2001, a one day increase of $1 .18 .
207 . It was clear that the market accepted as true Omnicom's representations about th e
Company's business, in particular its organic growth . On April 26, 2001, Deutsche Bank issue d an analyst report entitled "Omnicom Group : Own for Market Leadership and EPS Consistency;
79 l Q01 Review," which stated, inter alia:
Omnicom's proven business model should continue to generate consistent double- digit EPS growth through 2002 . We expect Omnicom to continue to deliver industry-leading organic revenue growth of 12%-14%, which is double the rate of industry growth . In our view, 1 Q01 results and management's reaffirmation of its guidance amid a more challenging U.S. economic environment is a testament to the strength of Omnicom's business and geographical diversification . . . .
Behind this growth is its portfolio of leading agencies, as well as scale and scope of services . These compelling attributes place the company at the forefront of winning business from global advertisers that are increasingly rationalizing agencies in favor of global, single-source providers . Omnicom should continue to lead the industry in organic revenue growth and new business wins, as well as turn in 15% EPS growth . (Emphasis added .)
208 . On May 4, 2001, Omnicom issued a Schedule 13D/A form with the SEC , announcing the transfer of Agency stock held by Communicade to Seneca, which was signed b y
Defendant Weisenburger. The form stated that :
On May 2, 2001, Omnicom contributed the capital stock of its Communicade subsidiary and certain other assets to Seneca Investments LLC ("Seneca") and received a preferred stock interest in Seneca . The common stock in Seneca is owned by an unaffiliated entity; the preferred stock beneficially owned by Omnicom is not convertible into common stock and does not vote in the election of Seneca directors. Accordingly, Omnicom's beneficial ownership has decreased below 5% of Agency.com's outstanding common shares . (Emphasis added.)
209. On May 4, 2001, Omnicom issued a Schedule 13D/A form with the SEC, announcing the transfer of Organic stock held by Communicade to Seneca, which was signed by
Defendant Weisenburger. The form stated that :
On May 2, 2001, Omnicom contributed the capital stock of its Communicade subsidiary and certain other assets to Seneca Investments LLC ("Seneca") and received a preferred stock interest in Seneca . The common stock in Seneca is owned by an unaffiliated entity; the preferred stock beneficially owned by Omnicom is not convertible into common stock and does not vote in the electio n
80 of Seneca directors. Accordingly, Omnicom's beneficial ownership has decreased below 5% of Organic's outstanding common shares . (Emphasis added.)
210. On May 4, 2001 , Omnicom issued a Schedule 13D/A form with the SEC , announcing the transfer of Razorfish stock held by Communicade to Seneca, which was signe d by Defendant Weisenburger. The form stated that :
On May 2, 2001, Omnicom contributed the capital stock of its Communicade subsidiary and certain other assets to Seneca Investments LLC ("Seneca") and received a preferred stock interest in Seneca . The common stock in Seneca is owned by an unaffiliated entity; the preferred stock beneficially owned by Omnicom is not convertible into common stock and does not vote in the election of Seneca directors. Accordingly, Omnicom's beneficial ownership has decreased below 5% of Razorfish's outstanding common shares . (Emphasis added.)
211 . The statements contained in 11207-210 above were knowingly materially fals e and misleading when made, or were made with reckless disregard for the truth, because the y falsely describe the Seneca transaction as a disposition of control and assets to an unaffiliate d party when, as described above at IT 112-140 Omnicom retained control of Seneca after th e transaction .
212. On May 14, 2001, Onmicom filed a Form 10-Q with the SEC which was signe d by Defendants Weisenburger and Angelastro . The Form 10-Q disclosed that "[c]onsolidated worldwide revenue increased 16 .1 % in the first quarter of 2001 to $1,601 .1 million compared to
$1,379 .0 million in the first quarter of 2000 ." In addition, the Company disclosed the following:
The operating margin, which excludes net interest expense, was 11 .9% in the first quarter of 2001 as compared to 11 .9% in the same period in 2000 . Excluding the gain on sale of Razorfish shares, pretax profit margin was 10 .7% in the first quarter of 2001 as compared to 11 .0% in the same period in 2000 .
81 Excluding the gain on sale of Razorfish shares, net income increased 19 .6% to $95 .3 million and diluted earnings per share increased 15 .6% to $0.52 in the first quarter of 2001 . Including this gain, net income decreased 33 .6% to $95 .3 million in the first quarter of 2001 as compared to $143 .5 million in the same period in 2000 and diluted earnings per share decreased 33 .3% to $0 .52 in the current quarter compared to $0 .78 in the prior year period.
In May 2001, we contributed to a new holding company the equity of an entity that held our investments in several public and private companies which had been classified as long term investments . The investments were primarily companies in the e-services industry. We received 8 .5% cumulative preferred stock for its contribution. The common stock of the new holding company is owned by a private equity fund. No gain or loss was recognized in this transaction .
Management continually monitors the value of these investments to determine whether an other than temporary impairment has occurred . As of the quarter ended March 31, 2001, the carrying value of these investments approximated their fair value.
213 . Defendants knew or recklessly disregarded that the statements contained in ¶ 21 2 above, were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in more detail above, that then-existed, the disclosure of which was necessary to make the statement s made not materially misleading:
(a) As set forth in IT 76-105, 149-159 above, the Company's reported earnings, operating margin, and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(b) As set forth in ¶¶ 112-140, 166-174 above, under GAAP and SEC rules ,
82 Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(c) As set forth in ¶¶ 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requi ring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies;
(d) As set forth in ¶¶ 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million ;
(e) As set forth in ¶¶ 160-168 above, contrary to the Company's represen- tations that "the carrying value of these [Communicade] investments approximated their fair value", in contravention of GAAP and other applicable accounting standards, Omnicom failed to record the Seneca transaction at fair value which would have required the Company to record a loss on the transaction; and
(f) Defendants failed to disclose that first quarter 2001 results were met only because they engaged in the GAAP violations discussed above .
C. Omnicom's Second Quarter Fiscal Year 2001 Result s
214. On July 24, 2001, Omnicom issued a press release announcing its financial result s for the second quarter of 2001, the period ending June 30, 2001 . The Company reported that net income for the second quarter of 2001 increased 19% to $151 .4 million from $127.4 million in the second quarter of 2000 . The Company also reported that worldwide revenue increased 15 % to $1 .746 billion in the second quarter of 2001 from $1 .520 billion in the second quarter of 2000 .
215. Also on July 24, 2001, Omnicom held a conference call to discuss its financia l results for the second quarter of 2001 . During the conference call defendant Weisenburger
83 touted the Company's growth :
Organic growth for the quarter was 12%, that was driven primarily by very strong net new business wins last year and on a relative basis very strong results year to date . For the six month period organic growth was 13% . . . . [I]n the U.S . for the quarter 14.9% was our total growth of which organic growth was 11 .5% and 3 .4% was a result of acquisitions. For the six month total growth in the U.S . was 19.6%, acquisitions accounting for 6.6% of that and organic growth was 13% . Internationally, organic growth during the quarter was very strong at 12 .7%, and acquisitions added an additional 11 .8% growth and FX was a negative 9 .6%, bringing down the international total growth to 14.9. . .. For the six months: international organic growth was 12.7% and acquisitions add an additional 7/2%, FX was negative by 9 .3 bringing the total down to 10 .9 . (Emphasis added .)
216. Defendants knew or recklessly disregarded that the statements contained in
IT 214-215 above were materially false and misleading when made, and were made without a reasonable basis, because they misrepresented and/or omitted the following adverse fact s discussed in detail above, that then-existed, the disclosure of which was necessary to make the statements made not materially misleading :
(a) As set forth in It 112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in ¶¶ 76-105, 149-159 above, the Company's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entitie s transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in ¶¶ 178- 186 above, in contravention of GAAP and SE C
84 rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(d) As set fo rth in 1161-63, 178-186, 248-250 above , in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million; and
(e) As set forth in IT 54-60, 248-250 above, the Company's statements describing its organic growth were false and misleading because Omnicom included the results of just-acquired companies in these figures ; and
(f) Defendants failed to disclose that the second quarter 2001 results were met only because they engaged in the GAAP violations discussed above .
217. The market reacted favorably to Omnicom 's representations about the Company's second quarter results . In response to the press release and conference call contained in It 214-
215 above, the share price of Omnicom closed at $82 .90 on July 24, 2001, a one trading-day increase of $4.38 . On July 24, 2001, Bear Stearns issued a report entitled, "Impressive Quarter;
Reaffirms Favorable Outlook ." In the report, the analysts wrote that :
Organic growth was within the range of the company ' s guidance at 12%, a very impressive number given the lackluster economic environment and relative to the mid single digit growth rates generated by its peers . Management commented that while they are seeing some deterioration in Europe (particularly the UK and Germany) market share gains have largely buffered this slowdown for Omnicom . Net new business wins was surprisingly strong at just over $1 billion in the quarter and management reiterated their hopes to keep this quarterly win total above $1 billion for the remainder of the year .
We reiterate our Buy rating on shares of OMC. These impressive results are further confirmation of OMC' s leadership position in the advertising market . The company's new business backlog, its diverse client base and its expansive
85 presence in so many markets clearly provide a competitive edge in this challenging environment.
218. On August 14, 2001, Omnicom released its second quarter fiscal year 2001 results issued on a Form 10-Q, and signed by Defendants Weisenburger and Angelastro . The Form 10-
Q disclosed that "[c]onsolidated worldwide revenue increased 15 .5% in the first six months o f
2001 to $3,347.9 million compared to $2,899.3 million in the first six months of 2000 ." The
Form 10-Q also disclosed:
Operating margin, which excludes net interest expense, was 14.4% for the first six months of 2001 as compared to 14.4% in the same period in 2000 . Pretax profit margin was 13 .2% for the first six months of 2001, as compared to 13 .5% in the same period in 2000.
Excluding the gain on sale of Razorfish shares, net income increased 19 .1 % to $246 .6 million in the first six months of 2001 as compared to $207.1 million in the same period in 2000 and diluted earnings per share increased 15 .8% to $1 .32 in the first six months of 2001 as compared to $1 .14 in the same period in 2000 . Including this gain, net income decreased 9 .0% to $246.6 million in the first six months of 2001 as compared to $270.9 million in the same period in 2000 and diluted EPS decreased 10 .8% from $1 .48 for the same period in 2000.
In May 2001, the Company contributed to a new holding company investments in several companies, p rimarily in the e-services industry, and cash. Upon contribution, the investments were reclassified from long-term investments and investments in affiliates to cost basis investments and included in other assets in the accompanying balance sheet . No gain or loss was recognized on the transaction.
Management continually monitors the value of its investments to determine whether an other than temporary impairment has occurred . As of the period ended June 30, 2001, the carrying value of the Company's investments approximated its fair value.
86 219. Defendants knew or recklessly disregarded that the statements contained in ¶ 21 8 above, were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in more detail above, that then-existed, the disclosure of which was necessary to make the statement s made not materially misleading:
(a) As set forth in 11112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the tr ansaction;
(b) As set forth in ¶¶ 76-105, 149-159 above, the Company's reported earnings, operating margin, and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in 11178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(d) As set forth in 1161-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(e) As set forth in ¶54-60, 248-250 above, the Company's statements describing its organic growth were false and misleading because Omnicom included the results of just-acquired companies in these figures ; and
(f) Defendants failed to disclose that the second quarter 2001 results were met only because they engaged in the GAAP violations discussed above .
87 D. Omnicom's Third Quarter Fiscal Year 2001 Result s
220. On October 23, 2001, Omnicom issued a press release announcing its financia l results for the third quarter of 2001, the period ending September 30, 2001 . The Company reported that net income for the third quarter of 2001 increased 8% to $92 .4 million from $85 . 7 million in the third quarter of 2000 . The Company also reported that its worldwide revenue increased 8% to $1 .571 billion in the third quarter of 2001 from $1 .452 billion in the third quarter of 2000 .
221 . Defendants knew or recklessly disregarded that the statements contained in ¶ 22 0 above were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in detai l above, that then-existed, the disclosure of which was necessary to make the statements made no t materially misleading:
(a) As set forth in ¶¶ 112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in ¶¶76-105, 149-159 above, the Company's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in ¶¶178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
88 (d) As set forth in ¶161-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(e) As set forth in ¶154-60, 248-250 above, the Company's statements describing its organic growth were false and misleading because Omnicom included the results of just-acquired companies in these figures ; and
(f) Defendants failed to disclose that the third qua rter 2001 results were met only because they engaged in the GAAP violations discussed above .
222. In response to the press release as set forth in ¶ 220 above, the share price o f
Omnicom closed at $78 .10 on October 23, 2001, a one day increase of $4 .17, reflecting th e market's acceptance of Omnicom's representations.
223 . On November 14, 2001, Omnicom filed its third quarter fiscal year 2001 results issued on a Form 10-Q, with the SEC, and was signed by Defendants Weisenburger and
Angelastro. The Form 10-Q disclosed that "[c]onsolidated worldwide revenue increased 13 .0% in the first nine months of 2001 to $4,918 .9 million compared to $4,351 .8 million in the first nine months of 2000." The Form 10-Q also disclosed the following :
Operating margin, which excludes net interest expense, was 13 .5% for the first nine months of 2001 as compared to 13 .8% in the same period in 2000 . Pretax profit margin was 12.3% for the first nine months of 2001, as compared to 12 .6% in the same period in 2000, excluding the realized gain on sale of Razorfish shares. The decrease in operating margin and pretax profit margin was driven primarily by lower than expected revenue growth in the third quarter of 2001, which management believes was due, in part, to the tragic events of September 11, 2001 .
Excluding the gain on sale of Razorfish shares, net income increased 15 .8% to $339.0 million in the first nine months of 2001 as compared to $292 .8 million in
89 the same period in 2000 and diluted earnings per share increased 13 .0% to $1 .83 in the first nine months of 2001 as compared to $1 .62 in the same period in 2000 . Including this gain, net income decreased 4 .9% to $339 .0 million in the first nine months of 2001 as compared to $356 .6 million in the same period in 2000 and diluted EPS decreased 6.2% from $1 .95 for the same period in 2000 .
In May 2001, the Company and an unrelated third party formed a new holding company. The Company contributed investments in several companies, primarily in the e-services industry. The co-investor contributed cash. Upon contribution to the holding company, the Company reclassified its investments from long-term investments and investments in affiliates to cost basis investments and included them in other assets in the accompanying balance sheet . No gain or loss was recognized on the transaction . The Company holds a preferred equity interest and the co-investor holds the common equity interest in the holding company.
224. Defendants knew or recklessly disregarded that the statements contained in ¶ 22 3 above, were materially false and misleading when made, and were made without a reasonabl e basis, for the reasons stated because they misrepresented and/or omitted the following advers e facts discussed in more detail above, which then existed and the disclosure of which was necessary to make the statements made not materially misleading :
(a) As set forth in ¶¶ 112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in 1176-105, 149-159 above, the Company's reported earnings, operating margin, and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
90 (c) As set forth in ¶¶ 178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies;
(d) As set forth in ¶¶ 61-63, 178- 186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(e) As set fo rth in ¶¶ 160-168 above, in contravention of GAAP and SEC rules, Omnicom failed to disclose the Seneca transaction at fair value which would have required the Company to record a loss on th e transaction; and
(f) Defendants failed to disclose that the third quarter 2001 results were met only because they engaged in the GAAP violations discussed above .
E. Omnicom's Fiscal Year 2001 Results
225 . On February 19, 2002 , Omnicom issued a press release announcing its financial results for the fourth quarter of 2001 and full-year 2001, the periods ending December 31, 2001 .
The Company reported that net income for the fourth quarter of 2001 was $164 .1 million, compared to $142.2 million for the fourth quarter of 2000 . Worldwide revenue increased 9% to
$1 .970 billion in the fourth quarter of 2001 from $1 .802 billion in the fourth quarter of 2000 . For the full year 2001, net income increased 16% to $503.1 million from $435 million in 2000, while worldwide revenue increased 12% to $6 .889 billion in 2001 from $6 .154 billion in 2000 .
226 . Defendants knew or recklessly disregarded that the statements contained in ¶ 22 5 above were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in detai l
91 above, that then-existed, the disclosure of which was necessary to make the statements made no t materially misleading:
(a) As set forth in ¶ 112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(b) As set fo rth in ¶76-105, 149-159 above, the Company 's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered tempora ry;
(c) As set forth in ¶¶ 178-186 above , in contravention of GAAP and SEC rules, Omnicom' s reported results failed to disclose that Omnicom had material liabilities stemming from agreements requi ring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies;
(d) As set forth in IT 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million ; and
(e) Defendants failed to disclose that the fourth quarter 2001 and full year 2001 results were met only because they engaged in the GAAP violations discussed above.
227. It was clear that the market bought Omnicom's representations about th e
Company's growth when, on February 19, 2002, an analyst with UBS Warburg issued an analys t report on the Company which stated:
We believe that Omnicom represents the best of the breed among the top agency holding companies, demonstrated by the impressive operating results reported this morning in a difficult operating environment. For the fourth quarter, Omnicom
92 posted total revenue growth of 9%, 4.7% organic growth, 5 .5% acquisition growth and currency negatively impacting revenues by 1%. The strong organic growth we believe is attributed to a focused management, which is the only of the top holding companies to be unfettered with digesting an acquisition and has enabled market share gains. (Emphasis added.)
228 . On March 29, 2002, Omnicom filed with the SEC on Form 10-K its financia l results for the year ended December 31, 2001 . Defendants Wren, Weisenburger, Crawford, and
Angelastro signed the Form 10-K . The Form 10-K disclosed the following :
Our net income for 2001 increased by 15.7% to $503 .1 million from $435 .0 million in 2000 (exclusive of the Razorfish gain) and our diluted EPS increased by 12 .5% to $2 .70 from $2.40.
229. Moreover, defendants made the following statements relating to investments i n the Form 10-K:
In May 2001, the Company received a non-voting non-participating preferred stock interest in a newly formed company, Seneca Investments LLC, in exchange for its contribution of Communicade, the Company's subsidiary that conducted its e-services industry investment activities. The common shareholder of Seneca, who owns all the common stock, is an established private equity investment firm . We did not recognize a gain or loss on Seneca's formation, and management believes that the carrying value of our Seneca investment approximated its fair value at December 31, 2001 .
230. Defendants knew or recklessly disregarded that the statements contained i n
It 227-229 above were materially false and misleading when made, and were made without a reasonable basis, because they misrepresented and/or omitted the following adverse fact s discussed in detail above, that then-existed, the disclosure of which was necessary to make th e statements made not materially misleading :
(a) As set forth in 1111 2-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Senec a
93 transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ; since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in IT 76-105, 149-159 above, the Company's reported earnings were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in IT 178-186 above , in contravention of GAAP and SEC rules, Omnicom 's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requi ring the company, under certain circumstances , to make material additional investments, totalling at least $163 million to partially acquired companies;
(d) As set forth in ¶¶ 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million; and
(e) Defendants failed to disclose that the full year 2001 results were met only because they engaged in the GAAP violations discussed above .
F. Omnicom's First Quarter Fiscal Year 2002 Result s
231 . On April 30, 2002, Omnicom issued a press release announcing its financia l results for the first quarter of 2002, the period ending March 30, 2002. The Company reported net income for the first quarter of 2002 increased 11 % to $128 .6 million from $115 .3 million in the first quarter of 2001 . The Company also reported that worldwide revenue increased 8% t o
$1 .732 billion from $1 .601 billion in the first quarter of 2001 .
232 . Also on April 30, 2002, Omnicom held a conference call to discuss its financia l results for the first quarter of 2002 . During the conference call Defendant Weisenburger touted
94 the Company's growth :
[R]eported revenue growth for the quarter was up a positive 8 .2% which due to continued strong growth from net new business performance consisted of 3 .7% organic growth with acquisitions adding another 5.6% growth and foreign exchange, which continued to be negative, reduced our revenues by 17V2 million or about 1 .1 %. . . .
In the United States, total revenue growth for the quarter was 14% , that consisted of 6.6% organic growth and 7 .4% acquisition growth. For our international businesses organic growth for the quarter was just about flat, year over year, and acquisitions provided 3 .3% growth. As I mentioned, foreign exchange remained negative bringing down the international growth by 2%2% . (Emphasis added)
233 . Defendants knew or recklessly disregarded that the statements contained in
¶¶ 231-232 above were materially false and misleading when made , and were made without a reasonable basis, because they misrepresented and/or omitted the following adverse fact s discussed in detail above, that then-existed, the disclosure of which was necessary to make the statements made not materially misleading :
(a) As set forth in 1111 2-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliated party since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in ¶¶ 76-105, 149-159 above, the Company's reported earnings and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Omnicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in ¶¶ 178-186 above , in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requi ring the company, under certain circumstances , to make material additional investments,
95 totalling at least $163 million to partially acquired companies ;
(d) As set forth in It 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million;
(e) As set forth in ¶¶ 54-60, 248-250 above, the Company's statements describing its organic growth were false and misleading because Omnicom included the results ofjust-acquired companies in these figures; and
(f) Defendants failed to disclose that the first quarter 2002 results were met only because they engaged in the GAAP violations discussed above .
234. In response to Defendants' positive reports, UBS Warburg issued a positive repor t entitled "Omnicom Does it Again, Solid Q1 Results, Led By U.S . up 14%." The report explained that Omnicom' s
[r]esults were impressive given the on going challenging marketing environment, for the quarter revenues grew 8% (3 .7% organic, 5 .6% acquisitions, (1 .1%) foreign currency) to $1 .73 billion (vs. our $1 .71 billion estimate) and reported EPS of $0 .68 (vs. our $0.68) was a pro forma 10% increase year over year.
Organic growth was less than our estimated 5% and below down on a sequential basis. Strength in the domestic business which grew 14.0%, (6.6% organic and 7.4% acquisition), U.S. growth exceeded our estimated 6 .0% estimate.
235 . In addition, in May 2002, an analyst for BNP Paribas, issued a report on
Omnicom in which he wrote :
Omnicom is the undisputed leader in organic revenue growth and the only company in the sector with a value-creating acquisition strategy. The emphasis on revenue growth leaves plenty of room for margin improvements should company ever decide to shift focus . Omnicom represents high-octane performance, but with a stock price to match .
96 Omnicom is the only company in the sector, in our opinion, whose acquisition policy should be viewed as a source of value-creation. Excluding this positive effect, we find the stock fairly valued with respect to fundamentals and sentiment . We believe Omnicom's fundamental strengths (its global agency networks, and an acquisition policy of targeting multiple small, private acquisitions) have created significant value for shareholders . We expect organic growth in revenues to continue to outperform in the medium term. (Emphasis added .)
236. On May 15, 2002, Omnicom released its first quarter fiscal year 2002 results issued on a Form 10-Q, and signed by Defendants Weisenburger and Angelastro . The Form 10-Q disclosed that "[c]onsolidated worldwide revenue in the first quarter of 2002 increased 8 .2% to
$1,732.4 million from $1,601 .1 million in the first quarter of 2001 ." The Form 10-Q als o disclosed the following :
Our operating margin was 13 .2% in the first quarter of 2002, slightly lower than our 13 .4% margin in the same period in 2001 .
Our net income in the first quarter of 2002, increased 11 .5% to $128.6 million from $115 .3 million in the first quarter of 2001 and diluted earnings per share increased 9 .7% to $0.68 in the first quarter of 2002, as compared to $0 .62 in the prior year period.
237. Defendants knew or recklessly disregarded that the statements contained in ¶ 23 6 above, were materially false and misleading when made, and were made without a reasonabl e basis, because they misrepresented and/or omitted the following adverse facts discussed in more detail above, that then-existed, the disclosure of which was necessary to make the statement s made not materially misleading :
(a) As set forth in 11 112-140, 169-177 above, under GAAP and SEC rules, Omnicom was required to continue to account for the investments it transferred to Seneca in its financial statements because the Seneca transaction was not a disposition of control and assets to an unaffiliate d
97 party since Omnicom retained control of Seneca after the transaction ;
(b) As set forth in IT 76-105, 149-159 above, the Company's reported earnings, operating margin, and net income were inflated because, in contravention of GAAP and SEC rules, Defendants improperly failed to take losses on and to write-down Onmicom's investments in the Communicade entities transferred to Seneca despite the fact that the severe impairments associated with such investments could no longer be considered temporary;
(c) As set forth in 11178-186 above, in contravention of GAAP and SEC rules, Omnicom's reported results failed to disclose that Omnicom had material liabilities stemming from agreements requiring the company, under certain circumstances, to make material additional investments, totalling at least $163 million to partially acquired companies ;
(d) As set forth in IT 61-63, 178-186, 248-250 above, in contravention of GAAP and SEC rules, Onmicom's reported results failed to disclose that the Company had incurred material liabilities, in connection with the Company's acquisitions, by entering into earn-out agreements which required the Company to pay at least $394 million; and
(e) Defendants failed to disclose that the first quarter 2002 results were met only because they engaged in the GAAP violations discussed above .
VIII. ADDITIONAL SCIENTER ALLEGATION S
238. Throughout the Class Period, the defendants acted intentionally or recklessly i n orchestrating the fraudulent scheme alleged herein for the purpose of artificially inflating th e market price of Omnicom shares . Specifically, the defendants knew or recklessly disregarded that the statements described above were materially false and misleading in that they (a) failed t o timely write-down its investments in e-services companies ; (b) failed to record the Senec a transaction at fair value; (c) failed to properly account for Seneca following the Senec a transaction; (d) failed to disclose known trends and uncertainties associated with the Company' s business; (e) failed to properly calculate and report the Company's true growth rate vis-a-vis it s
98 competitors; and (f) failed to disclose material liabilities associated with its strategy of growth- by-acquisition.
A. The Defendants Had Actual Knowledge of the Accounting Improprieties and Misleading Nature of its Organic Growth Calculatio n
(i) The Seneca Transaction
239 . Throughout the Class Period, the defendants had actual knowledge of the fact tha t the creation of Seneca, a purportedly arms-length transaction in which control over the Senec a entities supposedly shifted from Omnicom to Seneca, was a sham transaction that wa s undertaken for the sole purpose of removing the Seneca entities from Omnicom's financia l statements . At the time of Seneca's creation , the defendants knew that Omnicom ' s e-services investments had suffered severe, other than temporary impairment in value, as well as sever e operating losses, which would have a material impact on Omnicom's financial statements . The defendants knew that Omnicom improperly avoided writing down the Seneca entities, i n violation of GAAP, and they knew that Omnicom improperly accounted for Seneca and the
Seneca transaction in its financial statements in furtherance of their fraudulent scheme.
240 . By the beginning of the Class Period, the defendants knew that Omnicom wa s obligated to take significant write-downs with respect to the Seneca entities . By the end of fiscal
2000, the defendants knew that the internet bubble had burst, and that all of Seneca's e-services investments had been substantially and permanently impaired . Indeed, as detailed above at
IT 76-105, by the fourth quarter of 2000 and the first quarter of 2001, the fair value of Agency ,
Organic and Razorfish had fallen far below Omnicom's carrying value .
241 . Defendant Wren was on the Board of Directors of Agency, the largest of th e
99 Seneca entities. Accordingly, he was intimately familiar with Agency's financial results and future prospects . As set forth above, by December 14, 2000, Agency had announced that it wa s laying off employees and taking substantial restructuring charges to account for the sever e downturn of the internet and e-services market . In fact, the Defendants admitted in Omnicom' s
2000 10-K that by December 2000, the fair value of Agency had fallen below Omnicom' s carrying value. (2000 Form 10-K at F-15.)
242. Similarly, the defendants knew, or recklessly disregarded the fact that b y
December 2000, both Organic and Razorfish had announced that they had suffered permanen t impairment as a result of the internet market decline . As detailed above, both of these companie s had also issued press releases in December 2000 announcing that they had suffered serious, othe r than temporary declines. By December 31, 2000, Organic was trading at $0 .81 per share, over
$19 below Omnicom's carrying value of $20 per share, and Razorfish was trading at $1 .62, over
$14 below Omnicom's carrying value of $16 per share .
243 . The Defendants knew that as a result of these other than temporary declines ,
Omnicom was required to write-down these investments by at least the fourth quarter of 200 0 and the first quarter of 2001 . Indeed, they acknowledged in the notes to their financial statement s for the year ended December 31, 2000, that they were obligated to recognize impairments tha t were "other than temporary ." (2000 Form 10-K at F-7 - F-8 .) But rather than comply with th e requirements of GAAP, the defendants made a conscience decision to avoid taking the necessary write-downs and losses and orchestrated the Seneca transaction to improperly mask thei r disastrous decision to invest in these e-services companies.
100 244. As detailed above at 11 122-140, defendants Wren and Weisenburger were th e most senior officials of the Company, and they were directly responsible for devising the Senec a transaction. Defendant Weisenburger also signed Omnicom's Schedule 13Ds, which was file d with the SEC on May 14, 2001, reflecting Omnicom's transfer of Agency, Organic and Razorfis h to Seneca, as well as Seneca 's Schedule 13D and 13Gs, which were also filed with the SEC o n or about May 14, 2001, reflecting Seneca' s acquisition of Omnicom's interest in these entities .
Thus, defendant Weisenburger was also integrally involved in the Seneca transaction.
245 . Defendants Crawford and Angelastro, by reason of their positions at Omnicom had knowledge of Onmicom's financial statements related to Omnicom's Communicade and
Seneca investments . As the controller of Omnicom and a signatory to Omnicom's 10-Ks and 10-
Qs, Angelastro was in a position to know of the truth about these investments. Likewise,
Defendant Crawford, who signed the Company's 10-Ks, which stated, among other things, that
Omnicom regularly evaluated its investments and took appropriate write-downs, knew o r recklessly disregarded the fact that Omnicom had failed to do so for the material businesses in
Communicade/Seneca. Additionally, the defendants knew that the Seneca transaction was no t recorded at fair value . As noted above, the defendants knew that the market value of Omnicom's investments in the Seneca entities had fallen far below Onmicom's carrying value . In fact,
Omnicom's investments in Agency, Organic and Razorfish - its three largest e-service s investments - had each lost over 90% of its value between December 1999 and December 2000 .
With respect to its investment in Agency, the only Seneca entity that Omnicom accounted for o n the equity method, Omnicom admitted that this investment had dropped below its carrying valu e
101 s 1,
before the end of fiscal 2000. (2000 Form 10-K at F-14 .) Nevertheless, the defendants
fraudulently valued Omnicom's investment in Seneca's preferred stock as being equal to it s
carrying values of the Seneca entities . They did this because they knew that this was the only
way they could avoid the dramatic impact that these write-downs and losses would have o n
Omnicom's bottom line.
246 . Following the Seneca transaction, the defendants knew that Omnicom exercise d
control or, at the very least, "significant influence" over Seneca. As detailed above at ¶¶ 117-
121, the defendants knew or recklessly disregarded that no one from Pegasus went to work fo r
Seneca; rather, Omnicom employees Tierney and Neumann became the CEO and CFO . The
defendants also knew or recklessly disregarded that Seneca operated out of two cubicles i n
Omnicom's headquarters, and that Seneca was entirely dependent upon Omnicom fo r
administrative support and staffing .
247. Furthermore, as detailed above at IT 122-140, defendants Wren and Weisenburge r
knew that it was Omnicom who made the critical business decisions at Seneca. For example, it
was defendants Wren and Weisenburger who originally approached Agency and Organic abou t
taking the Companies private . And it was defendant Wren - not someone from Pegasus o r
Seneca - who negotiated the price at which Seneca would take Agency private . Moreover,
defendant Weisenburger signed the Agency and Organic proxies on behalf of Omnicom as a
"filing person." In this regard, as detailed above at ¶¶ 128, 134, pursuant to the general instruc-
tions to Schedule 13E-3 and Schedule TO, only control persons must file such documents with
the SEC. Thus, by definition, the defendants knew that Omnicom exercised control over Seneca .
102 (ii) `Organic Growth and Liabilities Associated with Acquisition s
248 . The defendants devised the Company's strategy of growth-by-acquisition . Thus, they knew that Omnicom was dependent on acquiring other, smaller companies in order to grow its revenue and earning's and meet Wall Street expectations . They were also the ones responsible for devising the Company's acquisition accounting, including the extent to which it would disclose liabilities associated with those acquisitions, and the extent to which growth associated with those acquisitions would be included in the Company's organic growth figures .
249. By prematurely incorporating a portion of the acquired-companies' growth int o
Omnicom's organic growth calculation, and then comparing that figure to its competitors, who were less aggressive in their calculations, the defendants knew or recklessly disregarded that they were presenting a false picture of the success of Omnicom . Furthermore, they knew or recklessly disregarded that they were masking the extent to which the Company was dependent on acquisitions to meet Wall Street estimates .
250. Similarly, the defendants were aware of the amounts of earn-outs that they would be forced to pay in connection with acquisitions, and they knew about Omnicom's obligations to purchase additional shares in acquired companies . Indeed, the Individual Defendants were the ones responsible for negotiating those deals in order to acquire the underlying companies in the first place. Furthermore, the defendants knew or recklessly disregarded that these amounts were material; indeed, they represented hundreds of millions of dollars worth of payments that any reasonable investor would have wanted to know about . The amount of the payments was determinable and reportable, but rather than disclose the massive amounts of liabilities, th e
103 defendants knowingly or recklessly withheld disclosure to shareholders. The defendants chose
this course because they knew that these amounts would dramatically alter the market place's
valuation of the Company . In fact, upon disclosure of the Company's liabilities with respect to
earn-outs, bond rating agencies lowered their rating for Omnicom, in part, due to the risks
associated with the earn-outs . For instance, Moody's, in a press release dated February 26, 2003,
stated that it:
presumed the earnouts to be more contingent on strong overall performance for the obligation to be realized . However, with earnouts tied more closely to a portfolio of individual agencies, the earnout payments are a near certainty and we now view them entirely as deferred acquisition financing costs or debt .
Similarly, both Fitch and Standard and Poors downgraded Omnicom's bond .
B. The Facts and Circumstances of this Case Support a Strong Inference That The Defendants Acted With Scienter
(i) The Defendants had the Motive and Opportunity to Commit Frau d
251 . The facts that the defendants had the motive and opportunity to commit the instan t fraud support a strong inference that the defendants acted with scienter . Prior to and during the
Class Period, the defendants and analysts emphasized Omnicom's record of year-over-year growth in revenues and earnings, as well as its history of meeting or exceeding Wall Street estimates. In fact, these factors were stressed by the defendants in the Company's press releases and other public statements, as well as in analyst reports, as detailed above .
252. By the fourth quarter of 2000, the defendants knew that, as a result of its losing investments in the Seneca entities, Omnicom would have to admit that it had not met Wall Street estimates and, for the first time in nearly a decade, would not be able to report year-over-yea r
104 growth from operations. In order to avoid these results, which would have had a dramatic an d immediate impact on the Company's stock price (as evidenced by the price drop that occurre d when the truth about Seneca was ultimately revealed), the defendants devised the instant schem e to remove Omnicom's losing e-services investments from its books . Only by undertaking thi s action were the defendants able to avoid the losses and write-downs that were required unde r
GAAP.
253. In addition, the defendants had the motive and opportunity to keep the Company' s stock price high so as to be able to continue to acquire companies with the Company's stock . As described in its 2000 and 2001 Forms I OK, Omnicom acquired 79 companies in 2000 and 200 1 alone, and it paid for those companies with cash and stock . Specifically, as set forth above, the
Company issued 127,069 shares in 1999, 81,508 shares in 2000 and 25,538 shares in 2001 to finance its acquisitions, which, in turn, fueled the Company's growth . By keeping th e
Company's stock price artificially inflated, the defendants could acquire the maximum number o f companies with the fewest number of shares. It allowed the defendants to minimized the numbe r of shares that Omnicom needed to issue in order to pay the acquisition costs, and thereb y minimized the dilution of shareholders' equity and the amount of earnings that would be require d to meet or beat Wall Street estimates .
254. Finally, Defendant Wren's compensation scheme created an additional motive for him to commit fraud . At Omnicom, like at most companies, executives received a salary, bonu s and options with a fixed vesting schedule. But in addition to these typical forms o f compensation, Omnicom also provided its it senior executives additional incentives linked
105 directly to the Company 's earnings per share perform ance and stock price.
255. Throughout the Class Period, the Company depended heavily on stock options as a carrot to motivate management. If expensed against earnings, these options awarded by the
Company would have reduced its bottom line by approximately 10% . In 2001, for example,
Omnicom issued 5 .733 million option under its "Long Term Value Shareholder Plan," an amount that analyst Lauren Fine of Merrill Lynch characterized as "staggering." (Fine, Obviating Much
(of the Convert) Confusion, May 30, 2002.)
256. For defendant Wren, the staggering number of options he received before and during the Class Period provided a strong motivation for him to artificially boost the Company's share price. Specifically, under Omnicom's typical, or "regular," (2002 Proxy at 10) option plan, defendant Wren was granted options to purchase 250,000 shares in early 1999, "namely because basic EPS was up 24%, revenues were up 30% over 1997 and operating margins increased to
13 .1% from 12.5%." (2000 Proxy at 10) . Additionally, in December 1999, defendant Wren was granted an additional 1,250,000 options, in part, "to serve as an incentive to Mr . Wren." (2000
Proxy at 11) Although the vesting of these options was not linked specifically to share price,
Omnicom stated that this extra option grant alone could be worth $181,724,093 if the Company's share price increased by 10% over ten years . (2000 Proxy at 8 .) Moreover, defendant Wren' s
1999 grant amounted to over 36% of all the options granted to all Omnicom employees . (2000
Proxy at 8) By the end of 2000, defendant Wren held $50,052,347 worth of exercisable options, which became more valuable as the Company's share price increased . (2001 Proxy at 7 .)
Furthermore, defendant Wren was granted 500,000 "regular" options in 2001 . (2002 Proxy at 9)
106 Accordingly, based on the "regular" option plan alone, defendant Wren had a fifty million dollar motivation to artificially inflate the Company's share price during the Class Period .
257. But in addition to these "regular" options, during the Class Period, large portions of defendant Wren's compensation also came from the Company's "early vesting" program
(2002 Proxy), which linked the vesting of additional options to Omnicom's share price .
Specifically, these share-price-based options would typically vest after six years . If, however, the share price increased by 50% from the date of the grant, then one-third of the options woul d immediately vest. Moreover, if the share price increased 75% from the date of the grant, two- thirds of the options would immediately vest, and if the share price increased 100%, all of the shares would vest . (2002 Proxy at 17). In 2001 alone, defendant Wren was granted 1 .5 million options under the share-price-based option plan . Accordingly, by increasing the stock price t o the designated thresholds, defendant Wren could accelerate the vesting of these options .
258 . By virtue of these options grants, defendant Wren had an additional, highly unusual motivation to conceal the truth about Omnicom's true financial position . By the end of
2001, Wren's total of 2 million options accounted for over 24% of all the options granted to
Omnicom employees for that year . Also, by year-end 2001, Wren sat on $63,850,013 o f exercisable options granted in earlier periods, and an additional $21,566,600 in option not ye t exercisable. (2002 Proxy at 7 .)
259. Furthermore, Omnicom provided Wren with a "Long-term Incentive Program, " which linked additional compensation directly to the Company's reported EPS performance . As reported in Omnicom's 2001 and 2002 Proxy Statements, if the current year's EPS was at leas t
107 120% of the past years figure, defendant Wren stood to received a sizable cash payout. Foi instance, if the Company's year-end 2000 EPS amounted to 120% of the year-end 1999 EPS , defendant Wren would earn an additional $4,393,125 . (2001 Proxy at 8 .) This payoff provided specific motivation for defendant Wren to prevent Omnicom's recognition of any impairment s relating to the Seneca entities in the fourth-quarter 2000, as it was required to under GAAP .
260. Finally, defendant Wren was perhaps the person who had most to lose i f
Omnicom's share price declined because he was the largest individual shareholder . As announced in the Company's 2002 Proxy, by March 31, 2002, defendant Wren beneficiall y owned 2,142,512 shares of Omnicom, or 1 .13% of the Company. (2002 Proxy at 14 .)
(ii) The Nature and Circumstances of the Seneca Transaction and its Accounting Treatment Support a Strong Inference that the Defendants Acted with CriPnf r
261 . The nature and circumstances of the Seneca transaction also support a strong inference that the defendants acted with scienter. Indeed, the lengths to which the defendant s went to be able to claim that they had no "beneficial interest" in the Seneca entities, while stil l exercising effective control over its investments, demonstrates that the true purpose of th e transaction was to remove those losing investments from its books and, thereby, deceiv e investors into believing that Omnicom was more successful than it actually was .
262. As noted above, the only way that the defendants could avoid the significant losses and write-downs associated with the Seneca entities was to transfer its interests in thos e entities to Seneca. In creating Seneca, however, the defendants had to be careful not to take back an interest in excess of 20% of the voting common stock, for if they did it would have been
108 obvious that Omnicom had to account for Seneca under the equity method. Such an accounting treatment would have negated the purpose for doing the transaction in the first place - i.e., as set forth above, the equity method would have required Omnicom to record its share of the Senec a entities operating losses and losses in value . So, in return for the Seneca entities and an undisclosed sum of cash, Omnicom received non-voting preferred stock .
263 . However, in order for the scheme to work, the defendants also had to avoid creating a loss in connection with the transaction itself. So, despite the fact that the defendants knew that the fair value of the Seneca entities was far less than the amount that Omnicom ha d invested, the defendants valued Omnicom's preferred stock interest in Seneca at exactly the same amount as its carrying value of the Seneca entities . Consequently, the defendants could record the transaction as an equal exchange and avoid any negative impact on Omnicom's bottom line .
264. After the transaction, the defendants knew that they had to be careful to avoi d
"beneficial ownership " and the appearance of exercising "significant influence" over its investments in the Seneca entities . For if they were the beneficial owners or exercised control ,
GAAP would require them to consolidate Seneca's financial results into Omnicom's . Such a result, once again, would defeat the entire purpose of the scheme, for it would force Omnicom t o recognize the losses of the Seneca entities . So, the defendants placed Omnicom employees
Tierney and Neumann as the officers of Seneca, and formally disclaimed beneficial ownership of their investments in the Seneca entities . For example, while Omnicom is included as a filing person on the Schedules 13D and 13Gs filed by Seneca in connection with its acquisition of
Omnicom's interests in Agency, Organic and Razorfish, Omnicom specifically disclaim s
109 ownership of all common shares to which those filings relate . Similarly, while Weisenburger
signed the Agency and Organic proxies on behalf of Omnicom as a filing person - a fact that
demonstrates a fortiori that it controlled Seneca, discussed supra - the proxies contain the
following language : ". . . as Omnicom and Pegasus Partners own all of the capital stock of
Seneca, they may be deemed to beneficially own the . . . common stock owned by Seneca,
although they disclaim beneficial ownership of these shares ."
265 . Nevertheless, despite the shift in the title of Omnicom's investments to Seneca ,
the defendants went about their business as usual, for example, by negotiating the going private
transactions of Agency and Organic, and thereafter announcing that these two entities would be
repurchased by Omnicom, as detailed above . From these facts, there is a strong inference that the
defendants always intended for the Seneca transaction to be one of form over substance, and that
the defendants true purpose in devising this scheme was to remove the Seneca entities from
Omnicom's books in order to deceive investors .
IX. APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE-MARKET DOCTRINE
266. At all relevant times , the market for Omnicom 's securities was an efficient market
for the following reasons, among others:
• Omnicom ' s stock met the requirements for listing, and was listed and actively
traded on the NYSE, a highly efficient and automated market ;
• As a regulated issuer, Omnicom filed periodic public reports with the SEC an d the NYSE;
• Omnicom regularly communicated with public investors via established marke t
110 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; and
• Omnicom was followed by several securities analysts employed by majo r brokerage firms who wrote reports which were distributed to the sales force and certai n customers of their respective brokerage fines . Each of these reports was publicly available an d entered the public marketplace.
267. As a result of the foregoing, the market for Omnicom's securities promptl y digested current information regarding Omnicom from all publicly available sources an d reflected such information in Omnicom's stock price . Under these circumstances, all purchasers of Omnicom's securities during the Class Period suffered similar injury through their purchase o f
Omnicorn's securities at artificially inflated prices and a presumption of reliance applies .
X. NO SAFE HARBO R
268. The statutory safe harbor provided for forward-looking statements under certai n circumstances does not apply to any of the allegedly false statements pleaded in this complaint .
Many of the specific statements pleaded herein were not identified as "forward-lookin g 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 forward-looking statements because at the time each of thos e
111 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 Omnicom who knew that those statements were false when made.
XI. CLAIMS FOR RELIEF
COUNT ON E
Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants
269 . Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.
270. During the Class Period, defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein ; and (ii) cause plaintiffs and other members of the Class to purchase Omnicom's securities at artificially inflated prices .
In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
271 . Defendants (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 a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Omnicom's securities in violation of Section 10(b) of the Exchange Act and Rule I Ob-5 . All defendants are sued either as primary participants in the
112 wrongful and illegal conduct charged herein or as controlling persons as alleged below .
272 . Defendants, individually and in concert, directly and indirectly, by the use, mean s or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Omnicom as specified herein .
273. These 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 Omnicom's value an d performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state materia l facts necessary in order to make the statements made about Omnicom and its business operation s and future prospects in the light of the circumstances under which they were made, not mislead- ing, as set forth more particularly herein, and engaged in transactions, practices and a course o f business which operated as a fraud and deceit upon the purchasers of Omnicom securities during the Class Period.
274. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts : (i) the Individual Defendants were high-level executive s and/or directors at the Company during the Class Period and members of the Company's man- agement team or had control thereof; (ii) each of these defendants, by virtue of hi s responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans,
113 projections and/or reports; (iii) each of these defendants enjoyed significant personal contact an d familiarity with the other defendants and was advised of and had access to other members of th e
Company's management team, internal reports and other data and information about the Com- pany's finances, operations, and sales at all relevant times; and (iv) each of these defendants wa s aware of the Company's dissemination of information to the investing public which they knew o r recklessly disregarded was materially false and misleading .
275 . The 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 t o ascertain and to disclose such facts, even though such facts were available to them . Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly an d for the purpose and effect of concealing Omnicom's operating condition and future busines s prospects from the investing public and supporting the artificially inflated price of its securities .
As demonstrated by defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actua l knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtai n such knowledge by deliberately refraining from taking those steps necessary to discover whethe r those statements were false or misleading .
276. 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 Omnicom 's securities was artificially inflated during the Class Period . In ignorance of the fact that market prices o f
Omnicom's publicly-traded securities were artificially inflated, and relying directly or indirectl y
114 on the false and misleading statements made by defendants, or upon the integrity of the market i n which the securities trade, and/or on the absence of material adverse information that was know n to or recklessly disregarded by defendants but not disclosed in public statements by defendant s during the Class Period, plaintiffs and the other members of the Class acquired Omnicom securities during the Class Period at artificially high prices and were damaged thereby .
277. At the time of said misrepresentations and omissions, plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true . Had plaintiffs and the other members of the Class and the marketplace known the truth regarding the problem s that Omnicom was experiencing, which were not disclosed by defendants, plaintiffs and other members of the Class would not have purchased or otherwise acquired their Omnicom securities , or, if they had acquired such securities during the Class Period, they would not have done so a t the artificially inflated prices which they paid .
278. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule lOb-5 promulgated thereunder.
279. As a direct and proximate result of defendants' wrongful conduct, plaintiffs an d the other members of the Class suffered damages in connection with their respective purchase s and sales of the Company's securities during the Class Period.
COUNT TWO
Violation of Section 20(a) of the Exchange Act Against the Individual Defendants
280. Plaintiffs repeat and reallege each and every allegation contained above as if full y set forth herein.
115 281 . The hidividual Defendants acted as controlling persons of Omnicom within th e meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of th e
Company's operations and/or intimate knowledge of the false financial statements filed by th e
Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, th e decision-making of the Company, including the content and dissemination of the variou s statements which plaintiffs contend 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 plaintiffs to be misleading prior to and/or shortly afte r these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected .
282. In particular, each of these defendants had direct and supervisory involvement i n the day-to-day operations of the Company and, therefore, is presumed to have had the power t o control or influence the particular transactions giving rise to the securities violations as allege d herein, and exercised the same .
283. As set forth above, Omnicom and the Individual Defendants each violated Section
10(b) and Rule 1 Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the
116 Company's securities during the Class Period.
XII. PRAYER FOR RELIEF
WHEREFORE , plaintiffs pray for relief and judgment, as follows :
• Determining that this action is a proper class action, designating plaintiffs a s
Lead Plaintiffs and certifying plaintiffs as class representatives under Rule 23 of the Federal
Rules of Civil Procedure and plaintiffs' counsel as Lead Counsel ;
• Awarding compensatory damages in favor of plaintiffs and the other Clas s members against all defendants, jointly and severally, for all damages sustained as a result o f defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
• Awarding plaintiffs and the Class their reasonable costs and expenses incurre d in this action, including counsel fees and expert fees ; and
• Such other and further relief as the Court may deem just and proper .
117 XIII. JURY TRIAL DEMAND
Lead Plaintiffs demand a jury trial of all issues so triable.
Dated: May 19, 2003
Respectfully submitted ,
-ZA~-&- -\ av~_O~- - Elaine S. Kusel (EK-2753) Max W. Berger (MB-5010) ~ 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) 554-140 0 Co-Lead Counsel for Lead Plaintiff New Orleans Employees' Retirement System and the Clas s
118 m x
.- r D CERTIFICATION OF PROPOSED LEAD PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAW S
I, F ti 011 12 S'z A 11 tv ,declare the following as to the claims asserted, or to be asserted, under the federal securities laws: 1 . I have reviewed the Omnicom Group , Inc. (NYSE: OMC) complaint prepared by Milberg Weiss Bershad Hynes & Lerach LLP, whom I designate as my counsel in this action for al l purposes. 2 . I did not acquire Omnicom Group, Inc. (NYSE: OMC) stock at the direction of plaintiffs counsel or in order to participate in any private action under the federal securities laws . 3 . I am willing to serve as a lead plaintiff either individually or as part of a group . A lead plaintiff is a representative party who acts on behalf of other class members in directing the action, and whose duties may include testifying at deposition and trial . 4 . I will not accept any payment for serving as a representative party beyond my pro rata sharp of any recovery, except reasonable costs and expenses, such as lost wages and travel expenses, directly related to the class representation, as ordered or approved by the court pursuant to law . 5 . I have not sought to serve or served as a representative party for a class in an action under the federal securities laws within the past three years, except : 6 . I understand that this is not a claim form, and that my ability to share in any recovery as a member of the class is unaffected by my decision to serve as a representative party. 7 . Since April 25, 2000, I have made the following transactions in Omnicom Group, Inc . and will provide records of those transactions upon request :
No. of Shares Buv/Sell Trade Date Price Per Share 10 000 3v Z 19 OZ, 8~-
Please use and attach additional pages if necessary .
I declare under penalty of perjury that the foregoing is true and correc t
Executed this ) I 11-day of , 2002
Print Name Signature z,.
_ASS PERIOD : 04/25/00 - 06/11/02 OMNICOM GROUP, INC . (NYSE : OMC) AVERAGE PRICE : $51 .24 6
PURCHASE TRANSACTIONS SALES TRANSACTION S SHARE PURCHASE SHARE SALES SHARES ESTIMATED ESTIMATED PLAINTIFF DATE SHARES COST AMOUNT DATE SHARES PRICE AMOUNT HELD VALUE (1) LOSSES`
Szanto , Phillip 02/19/2002 10,000 87 .0000 870,000.00 10,000 512,460.00 (357,540.00)
TOTAL ESTIMATED LOSSES : ($357.540.00) 1 ) Shares held through the date of this filing have been valued at $51 .246 per share . m x
co &y-16-2rV '05 :14 From-BERNSTEIN LITOWIT2 BERGER & GROSSMANN T-664 P .002/002 F-077
CERTIFICATIO N
Jerome Davis . Chairman of the New Orleans Employees' Retirement System ("'.FORS") declares, as to the claims asserted under the federal securities laws. that:
1 . He has reviewed a complaint filed in this matter.
2. NORS did not purchase the securities that are the subject of this action at the direction of its counsel or to participate in this private action.
3 . NORS is willing to serve as a Lead Plaintiff and class representative on behalf of the Class, including providing testimon y at deposition and trial, if necessary. NORS fully understands all of its duties and responsibilities as a Lead Plaintiff under the Private Securities Litigation Reform Act including; its duties as to the selection of counsel and overseeing the prosecution of the action for the class.
4. HORS' transactions in Omnicom Group_ Inc . securities that are the subject of this action are in the chart attached hereto.
5 . NORS initially sought to serve as a representative pany for a class in the follow ing action filed under the federal securities law during the three years preceding the date of this Certification but - was not appointed in favor of other investors with far more significant losses :
Waste Ala;iggeineni Securities Liricarion
6. ?FORS will not accept any payment for serving as a representative parry on behalf of the class beyond i ts pro rata share of any recovery. except such reasonable costs and expenses (including lost wva__es ) relating to the representation of the class as ordered or approved b y the court.
I declare under penalty of perjury that the foreenin_, is true : and correct . Executed this r?day of July 2002.
Jarume D .,\ Is C h:,irman NEW ORLEANS EM ('LOYEES' RETIREMENT SYSTEM New Orleans Employees' Retirement System Omnicom Group Inc. (OMG) Class Period : 4/25/00-6/12/02
Transaction Date Amount Price per share Loss Buy 03/06/01 4,900 $90.3786 Buy 01/14/02 2,000 $90.8500 Cost for 8,700 shares: Buy 03/06/02 1,800 $92.8253 $791,640.68 Sale of 8, 700 shares : Sale 06/19/02 (8,700) $52.8798 $460,054.26 Shares remaining of OMC: 0 Total Loss: ($331,586.42) n.
CERTIFICATION OF SERVIC E
I, Todd Kammerman, hereby certify that I caused a true and correct copy of the foregoin g
Plaintiff's Corrected Consolidated Class Action Complaint to be served on Jones Day, 222 East 41 S `
Street, New York, NY 10117, counsel for defendants , by hand delivery, on this 19th day of May,
2003 .
4oddKareirman