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1 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 SPENCER A. BURKHOLZ (147029) HENRY ROSEN (156963) 3 ANNE L. BOX (224354) LAURIE L. LARGENT (153493) 4 JULIE A. WILBER (246949) 655 West Broadway, Suite 1900 5 San Diego, CA 92101 Telephone: 619/231-1058 6 619/231-7423 (fax) [email protected] 7 [email protected] [email protected] 8 [email protected] [email protected] 9 Lead Counsel for Plaintiffs 10 [Additional counsel appear on signature page.] 11 UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13 OAKLAND DIVISION 14 In re YAHOO! INC. ) Master File No. 4:08-cv-02150-CW 15 ) ) CLASS ACTION 16 This Document Relates To: ) ) SECOND AMENDED CONSOLIDATED 17 ALL ACTIONS. ) COMPLAINT FOR VIOLATION OF THE ) FEDERAL SECURITIES LAWS 18 19 DEMAND FOR JURY TRIAL

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2 Page 3 On April 18, 2006, Defendants Issued False and Misleading Statements About Yahoo!’s 1Q 06 Financial Results and Promised Investors that Panama 4 Would Be Done by Year End 95 5 The Truth Begins to Emerge 100 6 CONFIDENTIAL SOURCES 112 7 DEFENDANTS’ KNOWLEDGE AND ADDITIONAL INDICIA OF SCIENTER 137 8 Defendants’ Knowledge of the Fraud 137 9 Overture 138 10 Panama 139 11 Systems and Controls 143 12 Click Fraud 144 13 Additional Indicia of Scienter 146 14 The Individual Defendants and Corporate Insiders Personally Profited from the Fraudulent Scheme 146 15 Executive Compensation 151 16 GAAP Violations 155 17 YAHOO!’S FALSE, MISLEADING AND OMITTED FINANCIAL 18 STATEMENTS AND DISCLOSURES 155 19 Yahoo! Recorded Improper and Unearned Revenue in Violation of SEC SAB Topic 13: Revenue Recognition 156 20 Quantifications of Improper Revenue Recorded by Yahoo! Due to Click Fraud 21 and Distribution Fraud During the Class Period 157 22 Yahoo!’s Inflated Revenue and EPS Were Material in Both Quantitative and Qualitative Respects 160 23 Yahoo!’s Failure to Accrue Liabilities for Obligations Arising from Click Fraud 161 24 Yahoo! Failed to Make Required Disclosures About the Impact of 25 Click Fraud on Its Results 162 26 Defendants Certified False and Misleading Financial Results 166 27 PROXIMATE LOSS CAUSATION/ECONOMIC LOSS 168 28

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2 Page 3 APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE 172 4 NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS 173 5 LEAD PLAINTIFFS’ CLASS ACTION ALLEGATIONS 173 6 7 8 9

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1 INTRODUCTION 2 1. This is a securities class action brought on behalf of all persons who purchased the 3 common stock of Yahoo! Inc. (“Yahoo!” or the “Company”) between April 8, 2004 and July 18,

4 2006 (the “Class Period”) and who suffered billions of dollars of losses due to the wrongdoing 5 alleged herein. The defendants are Yahoo! and Yahoo!’s top four officers, Terry S. Semel 6 (“Semel”), Susan L. Decker (“Decker”), Daniel L. Rosensweig (“Rosensweig”) and Farzad Nazem

7 (“Nazem”). This suit alleges violations of the Securities Exchange Act of 1934 (the “1934 Act”) and

8 Rule 10b-5 of the Securities and Exchange Commission (“SEC”), based on false statements and 9 material omissions concerning Yahoo!’s search marketing business, as well as one of the largest 10 insider trading schemes in history. Throughout the Class Period, defendants knowingly deceived 11 investors regarding the quality of Yahoo!’s paid search products, development of the Company’s 12 new advertising platform and ability to compete in the fast growing internet pay-per-click 13 advertising business. Defendants knowingly deceived investors regarding the performance of 14 Yahoo!’s paid search products and the financial health of the Company by inflating Yahoo!’s

15 financial statements during the Class Period based on improperly recognized advertising revenue 16 within the Company’s search marketing business.

17 2. Yahoo! lagged behind Google Inc. (“Google”) in not only its search engine 18 technology, but also in steadily losing market share to Google in the increasingly profitable search 19 market industry. Defendants were desperate to convince investors that Yahoo!’s business model was

20 succeeding and, most importantly, that its own paid search technology would outpace Google in the 21 emerging pay-per-click advertising business.

22 3. In 2002, Yahoo! bought the Inktomi search engine and, in 2003, purchased Overture 23 Services, Inc. (“Overture”), a search-driven advertising company. In order to stay competitive with 24 Google, Yahoo! had to integrate the Inktomi search engine technology as well as Overture’s search 25 advertising service. By early 2004, Yahoo! had integrated the Inktomi technology well enough to 26 terminate its agreement to use Google’s search technology. At the time, defendants were faced with 27 the more difficult task of integrating the outdated Overture technology. In 2004, during the Class 28 Period, defendants made false and misleading statements to the market that the integration of

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1 Overture’s search marketing technology and operations was “seamless.” In fact, from the time it

2 acquired Overture, defendants failed to disclose that the Overture integration was a disaster and that

3 its search engine and paid search products ( i.e., Sponsored Search, Content Match and Domain 4 Match) sold to Yahoo!’s advertising customers were far inferior to Google’s. Defendants concealed

5 that Yahoo! automatically enrolled its advertising customers in the Content Match and Domain 6 Match paid search products, which resulted in enormous amounts of useless advertising clicks and 7 low quality traffic merely to increase bogus revenues for Yahoo! and its third-party marketing 8 affiliates. 9 4. Upon the acquisition of Overture in 2003 and the initial release of Content Match, 10 Yahoo!’s search marketing business was overwhelmed, and its search technology overloaded, from 11 the massive increase in internet traffic brought by Yahoo! and the fact that Overture’s original 12 technology had not been built to work on a global scale. This resulted in Yahoo!’s Content Match 13 product, which was prematurely rushed to market, producing undesirable results. In addition, a 14 “culture clash” between Yahoo! and Overture employees stymied the integration of Overture. 15 Overture engineers in the Pasadena office left Yahoo! after the acquisition because Company 16 executives refused to provide the necessary resources to upgrade Overture’s technology platform, or 17 were terminated because of Yahoo! and Overture executives’ turf wars. Further, Overture sales 18 personnel competed for business with Yahoo! sales personnel.

19 5. Throughout 2004, as Google’s market share of paid search revenue was increasing 20 and Yahoo!’s was declining, defendants told investors the Overture integration was technically 21 smooth, proceeding as planned and successful – which it was not. The Overture system needed a 22 major technological overhaul: the original technology was hastily created during the internet boom 23 and was not designed to work on a global scale. Signing up paid advertising customers on 24 Overture’s search platform was painfully slow compared to Google’s automated system because 25 placing advertisements through Overture required manual review by Overture employees, whereas 26 new customers could sign up online with Google. Meanwhile, Yahoo! executives and engineers 27 could not decide whether to merge Overture with Yahoo!’s operations or let it remain quasi- 28

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1 independent. During 2004, Yahoo! faced the formidable task of completely overhauling the 2 Overture technology.

3 6. At this point in time, Overture was experiencing its greatest competition to date from 4 Google because Google’s new paid search offering – AdWords – allowed Google to siphon off 5 Overture’s existing and potential new advertising customers and reap increasing paid search 6 advertising revenues. Google’s AdWords product lured advertising customers to purchase keywords 7 through its fully automated system because Google’s system was designed to take into account how 8 much traffic each linked advertisement generated. Overture’s more expensive system allowed less 9 relevant ads to be placed at the top of Sponsored Search results simply because an advertiser bid 10 more for the keyword. This technological superiority drove significant paid search advertising 11 business to Google. Additionally, Google set their minimum bid per keyword lower than Overture, 12 at $.05 – a welcome invitation for advertisers.

13 7. During 2004, despite these devastating problems with the Overture integration and 14 the inadequacies of Yahoo!’s paid search advertising platform, defendant Semel assured investors 15 that the integration was “seamless.” Furthermore, to convince investors that Yahoo!’s paid search 16 products were competitive with Google, defendants assured investors that its Content Match product 17 was “driving overall revenue per search up.” In truth, Yahoo!’s Content Match product produced 18 undesirable, irrelevant results and angered customers. Defendants’ statements that Content Match 19 contributed to a large increase in the volume of clicks, and thus revenue, were false and misleading

20 because Yahoo! should not have been recognizing revenue from a portion of the clicks. Within the 21 Content Match paid search product, Yahoo! permitted disreputable, low quality affiliates to display 22 its customers’ advertisements next to their site’s content, and the placement of ads was often 23 irrelevant, which resulted in clicks that were not meaningful yet still cost the advertising customer 24 the same per click price as a click that resulted from a more targeted, Sponsored Search result.

25 8. Throughout the Class Period, defendants were also under incredible pressure to show 26 revenue and earnings growth and in particular to show growth in Yahoo!’s paid search business, 27 which was the fastest growing part of its business compared to its banner or impression 28 advertisement business. Any sign to the market that Yahoo! was not keeping up with Google, or

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1 growing less than 40% or giving lower guidance going forward, negatively impacted Yahoo!’s stock

2 price. In fact, when Yahoo!’s financial results just met expectations or concerns were raised about 3 its growth prospects during the Class Period, Yahoo!’s stock price declined. In order to conceal the 4 problems with its paid search business during the Class Period, and to meet earnings estimates, 5 defendants falsified Yahoo!’s financial results by improperly recognizing revenue it received via 6 click fraud. When analysts started raising the issue of click fraud in 2005, defendants falsely stated 7 “click fraud is not a significant problem” and that Yahoo! had a sophisticated click fraud detection 8 system in place. In fact, the opposite was true.

9 9. Click fraud occurs when an advertiser’s competitor clicks on ads in order to deplete 10 the advertising budget of its competitors. Yet this more commonly known form of “click fraud” was 11 not the only type affecting Yahoo!. Defendants also knew that Yahoo!’s Content Match and Domain 12 Match products allowed any website to join Yahoo!’s network, including Domain Aggregators and 13 bloggers who created websites with the sole purpose of deriving revenue from fraudulent clicks, 14 which the partners then shared with Yahoo!. This other type of improperly earned pay-per-click 15 advertising revenue is known as “distribution fraud.” Both examples have the common

16 characteristic that the advertisement is clicked for the sole reason to generate bogus revenue and not 17 because of a legitimate interest in the advertisement. The industry recognizes several methods by 18 which revenue can be improperly recognized via click fraud and distribution fraud. For a more 19 complete explanation of the different types of click fraud and the impact it had on Yahoo!’s results

20 during the Class Period see ¶¶47-59, infra. 21 10. Defendants allowed click fraud to continue because Yahoo! benefited enormously 22 from recognizing bogus advertising revenue. Advertisers paid Yahoo! every time a user clicked on 23 one of their ads. Through the Content Match program, Yahoo! would place a customer’s 24 advertisement on Yahoo!’s websites as well as its affiliates’ websites. These partners were paid a 25 percentage of the money collected by Yahoo! from its advertising customers. 26 11. Yahoo!’s other paid search product, Domain Match, similarly authorized click 27 charges on a per click basis to be passed along to customers for a method of advertising not 28 contemplated or agreed to by the customers when they contracted to advertise with Yahoo!.

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1 Advertising customers were not permitted to opt out of Domain Match and Yahoo! did not disclose 2 to its advertising customers that they were enrolled in this product. Yahoo! relied upon disreputable 3 domain partner websites to incorporate Yahoo! customer ads on low quality sites, and then charged 4 customers the same dollar amount per click as was charged for clicks resulting from more targeted, 5 Sponsored Searches. 6 12. Despite their access to internal statistics used by Yahoo! to track the low quality of 7 traffic generated by Content Match and Domain Match, defendants Semel and Decker were banking 8 on increasing Yahoo!’s revenues from these products as revenues from Sponsored Search were 9 decreasing. Although Yahoo! had the technical capability to provide customers with an opt-out 10 button for Content Match and Domain Match, Yahoo! deliberately chose to keep advertisers 11 automatically enrolled when contracting to advertise with Yahoo!. Semel, Rosensweig, Decker and 12 Nazem regularly received reports detailing performance issues associated with Content Match and 13 Domain Match from the managers who addressed the everyday issues with these two paid search 14 products – Tim Cadogan, Jeff Weiner, Ted Meisel and Bill Demas. Also, Rosensweig had close 15 contact with Pasadena sales and product management about improperly recognized advertising 16 revenue, customer complaints and the poor quality of Yahoo!’s search products. 17 13. At the same time defendants knew how Content Match and Domain Match were 18 improperly increasing bogus advertising revenue, customer complaints escalated. As a result, 19 Decker enforced Yahoo!’s policy that no one was allowed to tell any customer the basis for

20 determining refunds given in response to billing complaints. This information was kept solely 21 within the Click Activity Research (“CAR”) team and the Finance Department. As CFO, Decker

22 managed refund levels. Decker ran the numbers through models created by Yahoo!’s Loss 23 Prevention group to illustrate the incidences of low quality clicks from the various search products 24 (Sponsored Search, Content Match and Domain Match). 25 14. By early 2005, upgrading Overture’s system was becoming critical to Yahoo!’s 26 survival. First, Yahoo!’s average Cost per Click (“CPC) in many cases was higher than Google’s.

27 Additionally, Yahoo! knew it would soon lose its partnership with MSN to publish Yahoo!’s pay- 28 per-click (“PPC”) ads which would result in significantly decreased traffic and revenue. Beginning

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1 in 2005, Google was increasing its share of the search market industry and surging ahead of Yahoo!. 2 Buying Overture had helped to triple Yahoo!’s profits and defendants did not want to lose this 3 revenue while trying to overhaul the Overture platform. So, Yahoo! tried to accomplish both – 4 maintaining Overture as a stand-alone operation while at the same time planning to overhaul the 5 Overture system, known as Project Panama (“Panama” or the “project”). The ensuing disaster

6 prompted defendants to make false and misleading statements to the market about the schedule for 7 Panama’s completion.

8 15. By the summer of 2005, Yahoo! was under incredible pressure to entirely revamp its 9 advertising platform, not only from advertising customer complaints about soaring advertising costs 10 but also because it continued to lose market share to Google. On July 19, 2005, Yahoo! hosted a 11 conference call with analysts and investors. During that call, Semel told investors and analysts that 12 Yahoo! was “right on track” to “increase our abilities to monetize our sponsored search better” and

13 that the market would see a lot more of its development in the latter part of 2005. Industry experts, 14 securities analysts and investors all recognized “monetizing” paid search as a reference to Project 15 Panama. 16 16. Semel’s statement to the market that Panama would be “monetizing” or generating 17 revenue by year-end was false. At the time Semel made this statement to the market, virtually 18 nothing had been done in furtherance of Panama. It was impossible for Yahoo! to start generating 19 revenue by year-end because Yahoo! did not even have a plan in place by which to develop and

20 complete Panama. Originally, the Overture system had been written as one big chunk of code by 21 approximately 150 engineers over the course of 5 years. In order to make any change to that system, 22 Yahoo! had break this large chunk of code or “blob” into hundreds of thousands of codes that could 23 all talk to each other. At the time Semel made this false statement to the market, none of the code 24 had been written. Ultimately it took a full year for Yahoo! to write the code and another 11 months

25 to test the code and “migrate” ( i.e., transfer) over half a million advertising customers from the old 26 Overture system to Panama. Immediately after making the false promises of an impossible schedule 27 to monetize search revenue from Panama and at a time when Yahoo!’s stock price was artificially 28 inflated by this false statement, Semel sold massive amounts of his Yahoo! stock.

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1 17. By the time Semel made his July 2005 promises that Panama would be released by 2 the end of 2005, Yahoo! was formulating its third attempt at the development of Panama with the 3 third engineer in charge of Panama. An “Operating Committee” was formed to run the day-to-day

4 operations of Panama. First, the Panama Operating Committee wanted to change the way 5 advertisers interacted with Yahoo! to a system like Google’s where an advertiser’s keyword 6 purchases were based on the bid price multiplied by the “Click Through Rate” (“CTR”) for the 7 advertisement. The CTR is a measure used to determine the effectiveness of the advertisement by 8 measuring how often a user clicks on an ad when it is shown. For example, if an advertiser bid a 9 dollar per click for a keyword, but the advertisement had a low CTR, the advertiser’s bid would be 10 ranked below a competing advertiser who bid the same or even less for the same keyword, but who 11 had a higher CTR.

12 18. The second goal of Panama was to change the way advertisers interacted with the 13 Overture system – the “Ad Platform” – to a system more similar to Google. The Overture interface, 14 or Direct Traffic Center (“DTC”), which was originally built in 1998 or 1999 had become outdated. 15 The DTC was similar to a flat, large spreadsheet where each keyword had to be tied to an 16 advertisement and the “Uniform Resource Locator” (“URL”). A URL is the global address of the

17 advertisement on the internet. Google’s platform enabled advertisers to build campaigns containing 18 multiple advertisements and multiple keywords as opposed to Overture’s one keyword, one 19 advertisement, one price system. For example, an advertiser such as eBay owned at least a million

20 different keywords to drive traffic to its site. On Overture, each eBay keyword would have to be 21 connected with the same URL and same ad.

22 19. On August 8, 2005, Yahoo!’s Senior Vice President of Search and a member of the 23 Operating Committee, Jeff Weiner, spoke at Pacific Crest Securities Technology Forum about 24 Yahoo!’s search business. Weiner confirmed Semel’s false statement with his own false statement 25 that Panama would be complete by the end of 2005: “ [YJou ’ll start to see some changes by the end 26 of ‘05 and you’ll see bigger changes in ‘06.”

27 20. In August 2005, Yahoo! released a beta-test version of the Yahoo! Publisher’s 28 Network (“YPN”), which offered access to Yahoo!’s products and services to small and medium-

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1 sized publishers. A broader release to the market was made in November 2005. Yahoo! touted YPN 2 as an upgrade to Content Match, stating it provided the opportunity to partner with a tremendous 3 number of additional affiliates. The increased number of partnerships, however, decreased the 4 quality of the partners because Yahoo! was permitting even more small, disreputable websites – and 5 even blog sites – that were indifferent to the relevance of an advertisement placed on their site.

6 21. YPN promised to generate revenue for Yahoo! and its affiliates by displaying 7 advertisements that were supposed to match the content of the site they were placed on via Content 8 Match. By making all advertisements available to a broader market of partners starting in August 9 2005, without the proper business rules to ensure its partners were reputable or of good quality, YPN 10 actually exacerbated the existing problems of low quality traffic and click fraud or distribution fraud

11 (collectively referred to herein as “click fraud,” as described in ¶¶47-59, infra) that occurred as a 12 result of irrelevant placement. For example, advertisers in the travel industry were extremely 13 displeased when their ads appeared next to articles about train wrecks or terrorist attacks. Any clicks 14 on advertisements placed next to content irrelevant to the advertisement was outside the contract 15 terms of the agreement between Yahoo! and the customer, because Content Match was supposed to 16 utilize relevant content to promote the good or service being advertised. Furthermore, internet users 17 doing contextual searches (for news articles, for example) generally were not searching with the 18 intention of buying anything, as opposed to users conducting keyword searches utilizing Yahoo!’s 19 Sponsored Search product. Thus, clicks from contextual searchers were more random and

20 considered low quality, yet Yahoo! charged the customer the same dollar amount per click as it did 21 when an internet user specifically targeted the advertiser’s product or service via Sponsored Search. 22 22. When Yahoo! released YPN to the broader market in August 2005, Yahoo! 23 executives knew this would attract a large volume of poor quality traffic from bloggers and Domain 24 Aggregators. Domain Aggregators licensed domain names containing words spelled correctly and 25 incorrectly to attract large volumes of visitors. Management’s strategy, including defendant Nazem, 26 was to use this bogus revenue from the YPN and Content Match to help Yahoo! demonstrate strong 27 search revenue until the major Overture overhaul, Panama, was released. 28

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1 23. With regard to the ostensible update to Content Match released in August 2005, 2 Weiner falsely proclaimed to the market that it would see benefits “immediately” from “better 3 matching technology” and “better coverage.” In its desperation to increase revenue at a time when

4 Google was dominating the market share of the search industry, Yahoo! released this version of 5 Content Match, which along with YPN continued to have inadequate protections in place to prevent 6 low quality traffic like Domain Aggregators and bloggers. Unlike Google, Yahoo! never disclosed 7 to its advertising customers that Domain Aggregators would route huge volumes of irrelevant clicks 8 to their websites. Where Google was transparent about Domain Aggregators and maintained a 9 higher quality of partners, Yahoo! did not. 10 24. After Semel made his false statements to the market concerning Panama and Content 11 Match, Semel continued to sell his Yahoo! stock. Between July 26, 2005 and August 19, 2005, 12 Semel dumped 942,886 shares on the market, reaping $32,316,517 million from the inflated price of 13 Yahoo! stock. 14 25. By September 2005, the Panama Operating Committee came to the decision that 15 Panama would involve a rewrite of all systems, completely new from front to back-end. It was not 16 until October 2005 that Semel and Decker authorized Nazem to devote all necessary resources to the 17 project. Over the next three months Nazem and Panama’s chief engineer committed 300 engineers 18 to the project. A “Steering Committee,” chaired by Nazem, was formed to oversee the Panama 19 Operating Committee and communicated directly with defendants Semel, Decker and Rosensweig.

20 The Steering Committee met bi-weekly with Semel to update him on the progress of Panama. 21 26. From the time the Operating Committee was formed, it told Nazem that Panama 22 could not be rolled out by April 2006, the date Nazem was pushing for, and this information was 23 ultimately conveyed to Decker and Semel. Decker had regular contact with members of the 24 Operating Committee because Decker was “signing the checks” to pay for the extensive resources 25 committed to project Panama. 26 27. Despite their knowledge that a May 2006 date was impossible, Decker and Semel 27 made false statements to the market that Panama would be available in 2005. Incredibly, during the 28 3Q 05 analyst conference call, Semel and Decker lied to the market with respect to the status of

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1 Panama, stating, “[w]e continue to see excellent results” and “[w]e’re right on plan, improving and 2 growing our monetization” when in fact no real progress had been made toward the completion of

3 Panama. Decker followed up on Semel’s statements with her own series of false statements 4 concerning Panama: “[W]e expected to see some of those products hit and benefit late this year and 5 the financial impact to really build throughout 2006” and “[a]ll of these initiatives [Content Match 6 and Panama] have been already much right on track . . . that’s why we have been advising you that 7 we expect the financial impact to grow throughout 2006.”

8 28. Immediately after Semel and Decker made their false statements in October 2005, 9 Yahoo!’s stock price increased to $35.91. Shortly thereafter, Semel sold 3,000,000 shares of Yahoo! 10 stock, pocketing over $105 million in proceeds, while Decker sold 403,333 shares and reaped $15.7 11 million in proceeds.

12 29. It was not until November 2005 that a semblance of a Panama schedule was 13 established and an enormous number of engineers and resources were added to the project. The 14 Steering Committee was advised during their November 9, 2005 Steering Committee meeting that 15 Yahoo! did not have a credible timeline in place for Panama’s completion because the resource 16 requirements for Panama were not fulfilled. In December 2005, the Steering Committee discussed 17 what impact Panama schedule slips would have on corporate earnings. At that time, the existing 18 schedule allowed for quality assurance – a process to finalize the written software code – to take 19 place May 5, 2006 through August 1, 2006. It was impossible to release Panama prior to conducting

20 quality assurance, which was a precursor to migrating advertisers over to the Panama system. 21 Migration itself was a process for which no planning was conducted when the schedule was 22 established in fall 2005. The migration planning process required the coordination of Yahoo!’s

23 software engineers and sales personnel because hundreds of thousands of customers had to be 24 transferred to the new platform. Although the revised Panama schedule in November 2005 allotted 25 two months for migration, no basis for that part of the schedule existed because no planning was 26 completed. 27 30. On January 17, 2006, Yahoo! issued its 4Q 05 and FY 05 results and conducted a 28 conference call with securities analysts that same day. During that call, defendants stunned investors

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1 with the news that Panama would be delayed. Decker stated: “[W]e will start to see more benefit in 2 the back half but more meaningful as we move into ‘07 after we’ve had a full roll out of the 3 initiatives.” Yahoo!’s stock dropped more than 12% on the news that Panama would be delayed. 4 31. Despite telling the market Panama would be delayed, Yahoo! still over-promised to 5 the market when Panama would be complete and Yahoo! would begin to see meaningful revenue. 6 Members of the Operating Committee told Nazem in February 2006 there was “no way” a 2Q 06 7 release date was possible – consistent with what was said by the Operating Committee from the 8 beginning. Nazem responded, “What part of Q2 do you not understand?” – signaling the

9 desperation defendants felt about the lack of a realistic chance to make Q2 projections based on 10 revenue from Panama. 11 32. In January 2006, Nazem hired John Heller, former Vice President of Double Click, as

12 General Manager of Content Match. Decker, Nazem and Rosensweig knew at that time about the 13 spikes in improperly reported advertising revenue because of increasing customer complaints. 14 Heller met with Rosensweig and told him that continuing the operation of Content Match without 15 business rules on the back-end to ensure proper ad placement was crazy. Defendant Rosensweig 16 acknowledged to Paul Vollen, the individual in charge of Content Match, that releasing Content 17 Match in August 2005 to the broader market of advertisers was crazy, but he wanted it done anyway 18 in order to increase revenue. 19 33. In the spring of 2006, Heller and Rosensweig met with Decker about the problems

20 resulting from the huge volumes of poor click traffic and revenue generated by YPN. The subject of 21 the meeting was to “restart” a new version of Content Match. Rosensweig stated in the meeting that 22 because Yahoo! was already “bogged down in Panama” and that Content Match “was out there 23 operating and generating revenue,” he did not want to shut it down. A decision was made by all 24 participants at the meeting to “decouple” Content Match from Panama and to create “band aids” for

25 Content Match in a way that would increase control, but without changing the entire product or 26 taking it off the market. 27 34. Throughout March and April 2006, the Panama Steering Committee, along with 28 Semel, Rosensweig and Nazem, pressed the Operating Committee to commit to a June 2006 release,

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1 which was an impossibility. In March 2006, the Steering Committee discussed how there was only a 2 60% “confidence level” (meaning how confident the Operating Committee was that a deadline could 3 be met) that Panama would be released by July 2006 and a 70% confidence level of completion by 4 August 2006. Migration still had not been planned and was required before Yahoo! could earn 5 revenue from Panama. Three weeks after that meeting, the Steering Committee was informed the 6 confidence level in the July and August 2006 rollout dates each dropped 10%, and at that time only 7 40% of the code had been written – meaning there was no way Panama could be delivered to 8 customers by August 2006. And if Yahoo! could not deliver Panama by October, the whole project 9 would have to be pushed back even further because they could not migrate advertisers during 10 holiday season, the busiest time of the year. 11 35. Finally on July 18, 2006, defendants ultimately revealed to the public what they had 12 known for months internally, that Panama would not be introduced until 2007. When the Operating 13 Committee finally conducted adequate planning for the cumbersome process of migrating hundreds 14 of thousands of Yahoo!’s customers, it determined that migration, a necessary precursor to revenue 15 being earned, would not be complete until April 2007. At that time, Yahoo! also announced to the 16 market it had “recently terminated relationships with publishers that didn’t meet our standards.” In

17 effect, because of the rising concern over click fraud, Yahoo! was forced to terminate its poor quality 18 affiliates on YPN. Therefore, on July 18, 2006, Yahoo! issued its 2Q 06 results, which missed 19 revenue estimates, with Yahoo!’s search revenue falling 4%, rather than rising 4%, and announced

20 that Panama would not be fully rolled out in 4Q 06, instead delayed once again. Having been 21 misled for at least a second time on the rollout of Panama and learning of the termination of 22 third -party affiliates, investors punished Yahoo!’s stock, sending it down over 22% on 204 million 23 shares – over 10 times its normal trading volume. 24 36. Investors were troubled with defendants’ non-explanation for yet another delay of 25 Panama which was expected to produce more than $100 million in additional revenue each quarter. 26 Analyst Safa Rashtchy stated, “‘I find it troubling’” that they gave a “‘nonanswer’” to explain the

27 delay. “Panamawful” stated a RBC report, and “[m]anagement loses some credibility due to the 28 delay.” Another analyst (Pacific Crest) stated Panama was “the company’s most material project”

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1 and the delay was “disappointing.” The disappointing Panama delay news “was amplified by Q2’s 2 weaker than expected search results,” stated a Bear Stearns analyst with “[s]earch was relatively 3 weak” and “disappointing revenue per search.” A CIBC analyst report stated, “Reducing Outlook on 4 Delays in New Platform Launch & Slowing Rev/Search Growth” and “disappointing search

5 monetization and revenue per search were responsible for the weakness in US revenues.”

6 37. With settlement of a click fraud lawsuit brought by Yahoo!’s advertising customers, 7 the filing of another click fraud lawsuit in May 2006, and increased media scrutiny of the problem of 8 click fraud, Yahoo! was forced to announce that its search revenue was lower and its Traffic 9 Acquisition Costs (“TAC”) rates, meaning what precentage of revenue Yahoo! paid to its third-party 10 affiliates for each click on an ad, had increased as it was forced to terminate relationships with 11 affiliate websites that were contributing to click fraud. Yahoo!’s decision to acknowledge that it 12 needed to address the click fraud issue it was previously benefiting from would result in lower 13 revenue and margin growth rates going forward. In response to an analyst question about cutting off 14 “poor traffic affiliates” hurting revenue growth, defendant Decker admitted on the July 18, 2006

15 conference call that “the total effect on our rev[enue] ex-TAC took about 2 points off of our overall 16 growth” and “[w]e expect that roughly 200 basis points impact to continue for the back half.”

17 38. As this negative information entered the market, Yahoo!’s stock plunged from its 18 Class Period high of $43.66 in January 2006, first to as low as $34.33 per share in January 2006, and 19 then to as low as $24.91 in July 2006, falling much further and faster than the S&P 500 Index. The

20 decline in the prices of Yahoo!’s stock was caused by a series of company-specific revelations of 21 adverse information that had previously been misrepresented to, or withheld from, the market and 22 which undercut or was inconsistent with defendants’ earlier representations and Yahoo!’s earlier

23 reported financial results, damaging Class Period purchasers of Yahoo!’s stock billions of dollars, as 24 shown on the following graph:

25 26 27 28

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1 Yahoo! I nc. indexed vs. S&RWO, Goldman Sachs Internet hndez„i 2 January 3. 2006 to ,Duly 19. 2006 3

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11 Yahoo! SSP5130 CAS EnLeanet Irdex ^ifsaa^.,e^^"eoimrc,am+a ^sb.^,iuu. 12 $2[} GV03rf" G2roar-4w Mj aar"15 CM07f20013 05010r200 e W12020015 IM13r20 0e 01119MM 02l21J20W COMrMUS 04f25d2DW 05r2aaoo6 0ar2712006 13 14 39. However, Yahoo!’s top four executives did not fare so badly. By the time Yahoo!’s 15 publicly traded securities collapsed, they had pocketed nearly $880 million in illegal insider trading 16 proceeds by selling off almost 27 million shares of their Yahoo! stock – 84%-90% of the stock they 17 owned – at artificially inflated prices and before the truth entered the market. These sales were 18 unusual in timing and amount, dwarfing these insiders’ stock sales in the months before the Class 19 Period, as shown by the chart set forth below: 20 21 22

23 24

25 26 27 28

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1 Yahoo! Inc. 2 YA140OF All Defendants - Quarterly Insider Sales Dollar Volume January 2002 to December 2006 3 $200 $50 Class Period: 418104 - 7118106 Pre-Class Period Sales. 4 Shares Sold 7,643,734 Proceeds: $114,012,491

5 Class Period Sales: Shares Sold 26,694,443 — $40 Proceeds: $879,392,563 6 $150

N 7 C o _ $ 30 00 8 v ;E N E $100 9 D ^ 3 v

10 0 — $20 m 11 $50 12 - $10

13

14 — $o $0 IQ 2Q 3Q 4Q IQ 20 3Q 4Q IQ 2Q 3Q 4Q IQ 2Q 3Q 4Q IQ 2Q 3Q 4Q 15 2002 2003 2004 2005 2005 16 40. During the Class Period, the defendants’ positive statements, Yahoo!’s falsified 17 financial reports, and the scheme to defraud investors artificially inflated Yahoo!’s stock from a low 18 of $21 per share in March 2004, just before the beginning of the Class Period, to a Class Period high 19 of $43.66 per share in January 2006 – a price increase exceeding 100%, that substantially outstripped 20 the performance of the S&P 500 Index. Yahoo!’s top executives took advantage of the artificial 21 inflation in Yahoo!’s stock price, selling off an enormous amount of their Yahoo! stock – nearly 27 22 million shares – for illegal insider trading proceeds of almost $880 million! These sales were 23 suspicious in nature since they were far in excess of sales made before the Class Period. Yahoo!’s 24 top four executives below (“Individual Defendants”q each sold off between 80%-90% of the 25 Yahoo! shares they actually owned, as shown below: 26 27 28

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1 Defendant Position Shares Sold Proceeds % of Shares Sold Owned 2 Semel Chairman/CEO 17,766,786 $577,409,000 90.68% Rosensweig COO 2,101,000 $70,627,000 84.25% 3 Decker EVP/CFO 2,203,333 $73,885,000 84.65% 4 Nazem EVP/CTO 4,623,324 $157,470,000 88.30%

5 TOTALS: 26,694,443 $879,400,000

6 PARTIES 7 41. (a) Lead Plaintiff Pension Trust Fund for Operating Engineers purchased the 8 common stock of Yahoo! at artificially inflated prices during the Class Period and was damaged

9 thereby. 10 (a) Lead Plaintiff Pompano Beach Police & Firefighters’ Retirement System

11 purchased the common stock of Yahoo! at artificially inflated prices during the Class Period and was 12 damaged thereby.

13 (b) Plaintiff Ellen Rosenthal Brodsky purchased the common stock of Yahoo! at 14 artificially inflated prices during the Class Period and was damaged thereby. 15 42. Defendant Yahoo! is a public corporation with its executive offices in California. 16 Yahoo! also has offices in this District. During the Class Period, Yahoo! stock traded on the Nasdaq 17 in a highly efficient market, trading millions of shares every day. Yahoo! was followed by a large 18 number of analysts and was constantly in communication with the markets and investors in quarterly

19 conference calls and frequent presentations to investor and analyst conferences. Yahoo! also filed 20 periodic public reports with the SEC, and regularly issued press releases to the financial press. 21 Financial information about Yahoo! was widely distributed.

22 43. Defendant Terry S. Semel became the Chairman of the Board and CEO of Yahoo! in 23 May 2001 and served as such throughout the Class Period until June 18, 2007, when he gave up the 24 CEO position. Semel was thoroughly knowledgeable about all aspects of Yahoo!’s business 25 operations as he received constant reports regarding sales, demand, product quality, and customer 26 service and support issues. Semel had direct contact with the Operating Committee, which was in 27 charge of all the engineering architecture for the Overture platform and Panama, as well as the three

28 components of paid search – Sponsored Search, Content Match and Domain Match. The Operating

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1 Committee met daily and included Confidential Witness (“CW”) #1 and Mark Morrissey, and 2 advised Semel of the true progress of Panama. The Steering Committee, oversaw the Operating 3 Committee, and was responsible for managing the overall priorities, overseeing executive 4 expectations and communications, and ensuring resource needs were addressed within Panama. The 5 Steering Committee met weekly and communicated with Semel to discuss the status of Panama and 6 the types of problems expected within certain anticipated phases of Panama. Tim Cadogan and 7 Steve Mitgang, members of the Steering Committee, had bi-weekly meetings with Semel to update 8 him on the status of Panama. Also, Semel was well briefed regarding all technical or engineering 9 matters by defendants Nazem and Rosensweig, as well as Jeff Weiner, and was regularly and 10 accurately briefed regarding any important technical issues by defendant Nazem. Semel, along with 11 the other Individual Defendants, was on the Executive Sponsorship Committee, which functioned to 12 provide executive oversight of Panama because it was such an important project. The Operating 13 Committee kept the Steering Committee updated, who in turn kept the Executive Sponsorship 14 Committee informed of Panama’s status. Semel, along with the other Individual Defendants, also

15 received reports detailing performance issues associated with Content Match and Domain Match 16 from the managers that addressed the everyday issues within Content and Domain Match – Tim 17 Cadogan, Jeff Weiner, Ted Meisel, and Bill Demas. Semel was also briefed by Nazem at least once 18 weekly in person regarding the paid search business because of the revenue, risks and costs 19 associated with the paid search business. Semel was intimately involved in the preparation of

20 Yahoo!’s quarterly and annual financial statements, including the amounts of reserves and what 21 disclosures would be made, and the functioning of Yahoo!’s internal financial, accounting and

22 disclosure controls. Semel was also intimately involved in and fully knowledgeable concerning the 23 click fraud issues, even making public statements regarding the issue. He reviewed and approved 24 Yahoo!’s SEC filings and Annual Report to Shareholders and signed Yahoo!’s 2004 and 2005 10-

25 Ks, and its Sarbanes-Oxley certificates. During the Class Period, Semel sold 17,766,786 shares of 26 his Yahoo! stock (90% of the shares he owned) for $577,409,000 in insider trading proceeds. These 27 sales were unusual in timing and amount and inconsistent with Semel’s historical Yahoo! stock 28 sales, as the following chart shows.

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1 Yahoo! Inc. 2 YA140OF TerrySemel - Quarterly Insider Sales Dollar Volume January 2002 to December 2006 3 $120 $50 Class Period: 418104 - 7118106 Pre-Class Period Sales: 4 Shares Sold: 2,126,400 Proceeds: $40,372,474 5 $100 — Class Period Sales: Shares Sold: 17,776,786 — $40 Proceeds: $577,409,427 6 7 $80 — N C o — $30 0 8

E $60 I 9 ^o 3 61 — $20 10 0 $40 11

12 — $10 $20 13

14 $0 $0 1 Q 2Q 3Q 4Q 1Q 20 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 15 2002 2003 2004 2005 2005

16 44. Defendant Daniel L. Rosensweig was COO of Yahoo! throughout the Class Period 17 until March 31, 2007, when he left the Company. Rosensweig was thoroughly knowledgeable about 18 all aspects of Yahoo!’s business operations including Panama and the click fraud problem. As a 19 member of the Executive Sponsorship Committee, Rosensweig was consistently updated about the 20 status of Panama by the Steering Committee, which was kept informed by the Operating Committee, 21 as those three committees are described in ¶43. Rosensweig was also updated regarding the status of 22 Panama by Jeff Weiner and Ted Meisel. Problems within Content Match and Domain Match were

23 brought to Rosensweig’s attention by managers who addressed the everyday issues with these two 24 products – Tim Cadogan, Jeff Weiner, Ed Meisel, and Bill Demas. Rosensweig would bring any

25 issues regarding revenue quality problems to defendant Decker. Rosensweig was intimately 26 involved in the preparation of Yahoo!’s quarterly and annual financial statements, including the

27 amounts of reserves and what disclosures would be made, and the functioning of Yahoo!’s internal

28 financial, accounting and disclosure controls. He reviewed and approved Yahoo!’s SEC filings and

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1 Annual Report to Shareholders and Yahoo!’s 2004 and 2005 10-Ks. During the Class Period, 2 Rosensweig sold 2,101,000 shares of his Yahoo! stock (84% of the shares he owned) for 3 $70,627,000 in insider trading proceeds. These sales were unusual in timing and amount and 4 inconsistent with Rosensweig’s historical Yahoo! stock sales, as the following chart shows. 5 Yahoo! Inc. 6 YA3900F Dan Rosensweig - Quarterly Insider Sales Dollar Volume January 2002 to December 2006 7 $9 $50 Pre-Class Period Sales: Class Period: 418104 - 7118106 Shares Sold: 598,250 8 $8 — Proceeds: $5,536,238

Class Period Sales: 9 Shares Sold: 2,101,000 $7 _ Proceeds: $70,627,778 — $40 10

11 N $6 ^O o — $ 30 12 ;E^ $5 —

E m 13 cco ^° $4 — 3 61 — $20 14 0 0 $3 15

$2 16 — $10

17 $1

18 1 $o $o 1 Q 2Q 3Q 4Q IQ 2Q 3Q 4Q IQ 2Q 3Q 4Q IQ 2Q 3Q 4Q IQ 2Q 3Q 4Q 19 2002 2003 2004 2005 2005

20 45. Defendant Farzad Nazem was Executive Vice President and Chief Technology 21 Officer of Yahoo! until May 31, 2007, when he left the Company. Nazem was thoroughly 22 knowledgeable about all aspects of Yahoo!’s business operations including Panama and click fraud 23 issues. As a member of the Executive Sponsorship Committee, Nazem was consistently updated 24 about the status of Panama by the Steering Committee, which was kept informed by the Operating 25 Committee, as these three committees are described in ¶43. Nazem was also a member of the 26 Steering Committee, along with Ted Meisel, Steve Mitgang, Phu Huong, David Henke, Tim 27 Cadogan, and Jeff Weiner. Nazem oversaw and gave direction to the Operating Committee, and met

28 weekly with the head of this committee, CW1. Nazem also received the same regular reports

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1 detailing performance and issues associated with Content Match and Domain Match from Tim 2 Cadogan, Jeff Weiner, Ted Meisel, and Bill Demas that were received by defendants Semel and 3 Rosensweig, as described in ¶¶43 and 44. Nazem was intimately involved in the preparation of 4 Yahoo!’s quarterly and annual financial statements, including the amounts of reserves and what

5 disclosures would be made, and the functioning of Yahoo!’s internal financial, accounting and 6 disclosure controls. He reviewed and approved Yahoo!’s SEC filings and Annual Report to 7 Shareholders and Yahoo!’s 2004 and 2005 10-Ks. During the Class Period, Nazem sold 4,623,324 8 shares of his Yahoo! stock (88% of the shares he owned) for $157,470,000 in insider trading 9 proceeds. These sales were unusual in timing and amount and inconsistent with Nazem’s historical 10 Yahoo! stock sales, as the following chart shows. 11 Yahoo! Inc. 12 YA,3900! Farzad Nazem - Quarterly Insider Sales Dollar Volume January 2002 to December 2006

13 $35 j Pre-Class Period Sales: — $50 Shares Sold: 4,559,084 Class Period: 418104 - 7118106 Proceeds: $61 ,337,779 14 Class Period Sales: $30 Shares Sold: 4,623,324 1 Proceeds: $157,470,310 15 — $40

16 $25

N 17 0 o $ 30 0 m 18 - $ 20 — a E m 19 o0 co $15 - 20 - $ 20 0

21 $10 -

22 - $ 10

23 $5

24 0 0 $ 1 1 1 $ 1 Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 25 2002 2003 2004 2005 2005

26 46. Defendant Susan L. Decker was Executive Vice President of Finance and 27 Administration and CFO of Yahoo! during the Class Period. Decker was thoroughly knowledgeable

28 about all aspects of Yahoo!’s business operations as she received constant reports regarding sales,

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1 demand, product quality, and customer service and support issues, including advertising issues. 2 Decker was intimately involved in monitoring the click fraud issues at Yahoo. According to CW9, 3 Decker regularly reviewed customer complaints about click fraud. Decker also met weekly with 4 Semel, Rosensweig and Nazem where Nazem updated the other defendants as to the status and 5 delays with Panama. As a member of the Executive Sponsorship Committee, Decker was 6 consistently updated about the status of Panama by the Steering Committee, which was kept 7 informed by the Operating Committee, as these three committees are described in ¶43. Decker was 8 directly involved with the Overture engineering management, and was in communication with the 9 Operating Committee in charge of Panama because extensive resources were necessary and Decker 10 controlled the distribution of funds. Along with the other Individual Defendants, Decker was kept 11 apprised of the details regarding performance and issues associated with Content Match and Domain 12 Match via reports from Tim Cadogan, Jeff Weiner, Ted Meisel, and Bill Demas, as described in ¶¶43

13 and 44. Furthermore, Decker received information regarding revenue quality problems associated 14 with Content Match and Domain Match from defendant Rosensweig. Decker was intimately 15 involved in the preparation of Yahoo!’s quarterly and annual financial statements, including the

16 amounts of reserves and what disclosures would be made, and the functioning of Yahoo!’s internal 17 financial, accounting and disclosure controls. She reviewed and approved Yahoo!’s SEC filings and 18 Annual Report to Shareholders and signed Yahoo!’s 2004 and 2005 10-Ks, as well as its Sarbanes- 19 Oxley certificates. During the Class Period, Decker sold 2,203,333 shares of her Yahoo! stock (84%

20 of the shares she owned) for $73,885,000 in insider trading proceeds. These sales were unusual in 21 timing and amount and inconsistent with Decker’s historical Yahoo! stock sales, as the following 22 chart shows. 23 24

25 26 27 28

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1 Yahoo! Inc.

YA3900! Susan Decker - Quarterly Insider Sales Share Volume January 2002 to December 2006 2 700 $50 Pre-Class Period Sales f Class Period: 418104 - 7/18/0 6 3 Shares Sold: 360,000 Proceeds: $6,766,000 4 600— Class Period Sales: Shares Sold: 2,203,333 Proceeds: $73,885,048 — $40 5 500— 6

o — $30 0 7 400 — m T E ^

8 o co P 300— 9 $20 v^ 10 200— 11 $10 12 100—

13 0 $0 14 1Q 2Q 3Q 4Q 10 2Q 3Q 4Q 1Q 2Q 3Q 40 1Q 2Q 3Q 4Q 10 2Q 3Q 4Q 2002 2003 2004 2005 2006 15 16 THE TYPES OF CLICK FRAUD AND THE IMPACT ON YAHOO!’S FINANCIAL RESULTS DURING THE CLASS PERIOD 17 47. During the Class Period, Yahoo! improperly recognized advertising revenue from two 18 categories of click fraud: (1) traditional “Click Fraud” and (2) “Distribution Fraud.” 19 48. Industry experts describe that traditional Click Fraud occurs where either automated 20 systems or individuals repeatedly click on an advertisement solely for the purpose of creating 21 revenue for the site on which the ad appears. Dr. Charles A. Richard, a leading analyst and Vice 22 President of Outsell, Inc., a research and advisory firm focusing on advertising and publishing, 23 describes these categories of traditional Click Fraud as follows: 24 • Click Bots 25 Automated clickbot software, or Web server scripts, are popular among 26 scammers because it disguises the user’s unique IP address and can program clicks minutes apart to disguise intent. Many of these products are sold on the Internet. In 27 October 2007 Business Week interviewed a Russian programmer who created “Clicking Agent,” 5,000 copies of which he had sold to customers worldwide. It was 28

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1 marketed as a means to avoid detection; “the primary use is to cheat advertising companies,” the programmer said. 2 • Competitor Click Fraud 3 Competitor click fraud usually has the aim of draining a competitor’s budget 4 by repeatedly clicking on an ad. This also serves the purpose of driving the competitors ad offline, so that initiator’s ad will receive greater exposure. In a 5 variation of this type, some companies will “go dark,” removing their ads while clicking on their competitors’ ads. 6 49. Industry experts, including Harvard researcher Ben Edelman and Dr. Charles A. 7 Richard, also describe categories of Distribution Fraud. Distribution Fraud occurs in many fashions. 8 One example includes Yahoo!’s failure to ensure the advertisement does not appear on affiliates’ 9 websites, such as those in Yahoo!’s YPN network or any other third-party affiliate site, in a manner 10 not anticipated or permitted by the terms of the contract between Yahoo! and the advertisers, and 11 Yahoo! and the partner or third-party affiliate derive improper advertising revenue from these clicks. 12 The primary distinction between Distribution Fraud and traditional Click Fraud is that with 13 Distribution Fraud, non-billable clicks are charged to advertising customers because of unmonitored 14 or unknown third-party affiliates – that at times may be the result of repeated automated or human 15 clicks on advertisements – done intentionally to receive bogus revenue. Inherently, these bad third- 16 party affiliates have every reason to allow or even encourage bad clicks from Click Bots or 17 competitor advertisers because they drive up revenue that the third-party affiliate then shares with 18 Yahoo!. 19 50. Spyware syndication fraud is a particularly threatening niche of distribution fraud. 20 Spyware differs from “traditional” click fraud perpetrated on Yahoo’s advertising customers’ ads 21 because the spyware programs “simulate” the click itself resulting in the advertisers paying Yahoo! 22 for fake clicks, as referenced in Mr. Edelman’s descriptions of Distribution Fraud methods below. 23 Yahoo! advertisers expected their ad placement to be carefully targeted to their specific keywords. 24 An advertiser should only pay Yahoo! when a user actually clicks on the advertiser’s ad. The 25 spyware actually “fakes” a click and the advertiser gets charged. As a result, Yahoo! generated click 26 revenue outside the terms of the search marketing contracts with its advertisers. In addition to faking 27 28

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1 clicks, spyware is also used in numerous other fashions to create bogus clicks, as described by Mr. 2 Edelman below in ¶52.

3 51. During the Class Period, Yahoo! intentionally partnered with spyware syndicators, as 4 well as bad third-party affiliates such as Domain Aggregates and bloggers, in order to benefit from 5 the bogus clicks generated by spyware. Yahoo! concealed these partnerships from their advertising 6 customers and, therefore, these customers were not allowed to opt out of this source of illicit traffic 7 that was generating substantial revenue for Yahoo! Some of the largest and most nefarious of these 8 affiliates included Claria (aka Gator), Direct Revenue, Intermix Media, Inc., 180 Solutions, eXact 9 Advertising, WhenU, IBIS, and AdKnowledge. 10 52. According to Edelman, by allowing these improper ad placements, Yahoo endangered 11 its advertisers’ good names and risked putting them in violation of best practices and policy-makers’ 12 guidance. Mr. Edelman identified six distinct methods of Distribution Fraud – in combination with

13 Spyware syndication – which, through his research, he concluded were endorsed by Yahoo! 14 practices and third-party affiliates or partners:

15 Click Fraud Where No Click Actually Occurs. Through these improper ad displays, Yahoo charged advertisers for “clicks” that didn’t actually occur. This 16 violates the core premise of pay-per-click advertising, i.e., that an advertiser only pays if a user affirmatively shows interest in the advertiser’s ad. Yahoo promised to 17 “Pay only when a customer clicks on your listing.” But that was not true here. Instead, through click fraud, advertisers are asked to pay for spyware-delivered 18 traffic, whether or not users actually click.

19 Untargeted Traffic. Premium prices for PPC advertising reflect, in part, the extreme targeting of PPC leads: PPC ads are only supposed to be shown to users 20 actively searching for the specified product, service, or term. Yahoo promised: “Advertise only to customers who are already interested in your products or 21 services.” In fact spyware-delivered PPC results show Yahoo PPC ads to users with no interest in advertisers’ products or services. 22 Self-targeting Traffic. Spyware-delivered PPC ads often target advertisers with 23 their own ads. For example, a user browsing the Dell site, receives spyware-delivered Yahoo PPC advertising promising “up to 1/3 off” if a user clicked a prominent link. 24 But clicking that link didn’t actually provide any discounts or savings beyond Dell’s usual prices. However, each time a user clicked the link, Dell had to pay Yahoo a 25 PPC advertising fee estimated at $3.30. That’s a bad deal for Dell: These users were already at Dell’s site, and there’s no reason why Dell should pay Yahoo or a spyware 26 vendor just to keep them there.

27 Failure to Label Sponsored Links as Such. Through spyware syndication, Yahoo PPC ads often appear on users’ screens without appropriate labeling. When unlabeled 28 ads appear in or adjacent to search engine results, these ads risk violating the FTC’s

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1 2002 instructions for advertising disclosures at search engines. Seeing unlabeled text links inserted into ordinary web pages, users reasonably expect that such links were 2 chosen by the sites users were visiting, when in fact such links were unilaterally inserted by unrelated spyware installed without user consent. 3 Low-quality Traffic. Advertisers pay Yahoo a premium to reach desirable users at 4 Yahoo.com who are actively engaged in search. In contrast, spyware sends advertisers low-quality users, including users who are less likely to make a purchase. 5 This traffic is not worth the premium price Yahoo charges. Consider: 180solutions sells popups for as little as $0.015 (one and a half cents) per ad display. In contrast, 6 Yahoo charges a minimum of $0.10 – more than six times as much. Yahoo harms advertisers when Yahoo charges advertisers its premium prices for ads ultimately 7 shown through low-quality low-cost channels like 180solutions. 8 53. Dr. Charles A. Richard also describes various types of distribution fraud:

9 Match and Partner Site Dereliction 10 In programs such as Yahoo’s Content Match and Domain Match, the advertiser pays Yahoo or Google to make close matches of the subject of the ad with 11 the subject of the web page of the content partner onto which Yahoo places the ad. Yahoo makes this appeal on its Content Match page: “Generate additional revenue 12 by displaying ads related to the content on your web site.” See http://publisher.yahoo.com/sell/ContentMatch.php?loc=USYPN0005 13 Dereliction of this responsibility occurs when Yahoo fails to (a) take sufficient 14 measures to assure the ad relates to the content on Yahoo controlled web sites and/or (b) fails to monitor the content of its content partners’ web sites. It is not unusual for 15 unscrupulous web site operators to fill web pages with nonsense-text and then request that Yahoo place ads on the site under Content Match. These sites are often 16 called sblogs for “spam blogs.” Failure to maintain good content to ad subject matches and /or failure to routinely monitor content partners’ sites to detect sblogs 17 constitutes match and partner site dereliction fraud.

18 Spyware and Malware 19 Spyware and malware computer code embedded into webpages can falsely trigger clicks or redirect the web user to sites they have not chosen to visit for the 20 purposes of inflating advertising fees billed to advertisers. Benjamin Edelman has made multiple studies of this type of click fraud. 21 Paid to Read Sites 22 Affiliate fraud is probably the largest type. Yahoo, Google and other search 23 engines boost their profits by redistributing their ads to other sites, including millions of “domain parking” companies that host many thousands of dummy Web sites 24 containing little if any content beyond ads. The dummy sites or click fraud rings recruit thousands of individuals around the world, employing them in PTR or paid- 25 to-read campaigns, ostensibly to read articles of personal interest, but in reality to click on payable ads for which they earn about a penny per click. The PTR company 26 owners send their clickers e-mails touting hundreds of parked sites with Yahoo and Google ads, and urging them to click away. The fraudulent PTR sites are paid by the 27 domain parker networks, who in turn, have revenue sharing agreements with the large search engines. Click-scammers are able to get away with the fraud by 28

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1 employing fake IP addresses and using algorithms to determine click patterns less likely to be detected and blot-out identifying references. 2 Domain Kiting 3 Individuals take advantage of the five-day grace period offered by domain 4 registry sites such as the International Corporation for Assigned Names and Numbers (ICANN). The scammers will register a site, loading it with PPC ads to see if it 5 bears fruit. If it does not, they return the domain for a refund. If it works, they pay the $6 registration fee. Some return the domain at the end of the grace period, then 6 instantly and repeatedly re-register it, thus paying nothing. These so-called “domainers” can register thousands of sites. 7 Typo Squatters 8 This is the use of web sites with URL’s that purposely misspell a company 9 name, such as “Verison.com” for “Verizon.com,” and that count on traffic to these sites from searchers’ spelling errors when typing in their search terms. 10 54. Prior to 2004, Yahoo! knew of the bogus revenues generated by distribution fraud 11 because during the Class Period defendant Decker requested modeling related to the types of “out of 12 contract” revenues Yahoo! received from its spyware partners. In 2004, Goldman Sachs estimated 13 Yahoo! received $20 million in revenue from its partnerships with Claria and Intermix. According 14 to a former Yahoo! sales executive, spyware “was a dial we could turn if we needed more revenue.” 15 During the Class Period, advertisers who purchased PPC ads were inevitably and automatically 16 placed into the notorious spyware. By allowing these improper ad placements, Yahoo! not only 17 reaped a substantial amount of illicit revenue, but endangered its advertisers’ good names and risked 18 putting them in violation of best practices and policy makers’ guidance, as well as potentially 19 harming other websites. 20 55. Through research and statistical analysis, and particularly based upon two 21 independent studies conducted in 2006, Dr. Richard quantified the average proportion of paid clicks 22 attributable to click fraud – i. e., clicks that should have been non-billable to advertising customers – 23 and concluded 21.5% of paid clicks from which Yahoo! recognized revenue throughout the Class 24 Period were actually non-billable clicks. The statistical methods employed and the conclusions 25 reached by Outsell are detailed in the Click Fraud Research report, attached hereto as Exhibit A (the 26 “Click Fraud Research report”). Outsell is a research and advisory firm that conducts significant 27 original research each year in order to advise companies regarding competitors, markets, and best 28

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1 practices, and bases its advice upon independent, fact-based analysis. A firm resumé for Outsell is 2 attached to the Click Fraud Research report. Dr. Richard, who prepared the Click Fraud Research 3 report, is Vice President and Lead Analyst for Outsell, specializing in advertising and publishing, 4 and is frequently cited as an industry expert. Dr. Richard earned a Ph.D. and Masters degree in 5 Quantitative Business Analysis from the University of Washington in Seattle. 6 56. Advertising is a significant focus for Outsell’s clients, thus making advertising a 7 significant area of research for the firm. One advertising-related study conducted by Outsell on May 8 12-16, 2006 was designed to investigate advertisers’ assessments of the extent of click fraud in 9 online advertising (the “May 2006 Study”). Outsell confirmed the industry recognizes various types 10 of click fraud, including affiliated fraud or paid to read sites, which include millions of domain 11 parking companies, domain kiting, typo squatters, click bots, and competitor click fraud. Outsell 12 surveyed 407 U.S. advertisers, representing a well-distributed cross section of companies in the U.S. 13 that engaged in pay-per-click advertising. Outsell’s May 2006 research specifically examined the 14 extent and impact of click fraud by determining what methods the 407 advertisers surveyed used to 15 monitor fraudulent clicks. Two hundred and two (202) advertisers internally analyzed their own or 16 used third-party services to analyze their click logs. The Outsell’s Click Fraud Research report 17 refers to this group as the “Analyticals.” The remaining 205 advertisers did not use any method to 18 quantify the percentage of non-billable clicks on their paid ads, and thus only guessed as to the 19 percentage of fraudulent clicks, in contrast to the Analyticals. These 205 advertisers are referred to

20 as the “Non-Analyticals.” All 407 advertisers were also asked to provide their best estimate of the 21 percent of clicks on their own ads that were fraudulent, net of any refunds received for fraudulent 22 clicks. The Analyticals indicated 19.9% of the clicks on their own ads were fraudulent while the 23 Non-Analyticals indicated that the amount was 9.5%. 24 57. Outsell also conducted its Annual Ad Spending Study in August 2006 and surveyed 25 1,010 randomly selected advertisers (the “August 2006 Study”). The August 2006 Study included 26 the two identically worded click fraud questions asked in the May 2006 Study. The August 2006 27 Study also asked advertisers to rate the effectiveness of Yahoo! keyword ads (Sponsored Search) and 28 Yahoo! contextual ads (Content Match). Advertisers that purchased Yahoo! keyword ads (424 of the

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1 sample total of 1,010) quantified the net percentage of fraudulent clicks at 22.1%, and advertisers 2 that purchased Yahoo! contextual ads (354 of the sample total of 1,010) quantified the net 3 percentage of fraudulent clicks at 22.5%. Outsell concluded these 22.1 % and 22.5% net percentages 4 are likely conservative estimates, as the August 2006 Study, unlike the May 2006 Study, did not ask 5 a question that would determine which advertisers were “Analyticals” versus “Non-Analyticals.”

6 58. Outsell concluded it was reasonable to assume that since approximately half of the 7 advertisers from the May 2006 Study were Analyticals, about half of the August 2006 Study 8 advertisers were “Analyticals” as well. Given that the click fraud rate for Analyticals from the May 9 2006 Study is much higher than the Non-Analyticals and the set of 407 advertisers as a whole, 10 Outsell also concluded it is reasonable to assume that the click fraud rate for the “imputed 11 Analyticals” in the August 2006 Study would be much higher than the 1,010 advertisers sample as a 12 whole.

13 59. To accurately determine the net click fraud rate for Yahoo! advertisers, Outsell 14 recommended using an average of the three click fraud rates – 19.9% from the May 2006 Study and 15 22.1 % and 22.5% from the August 2006 Study, which equals 21.5%. Outsell concluded that these 16 three rates are the most analytically-based calculations that are closely tied to Yahoo!’s pay-per-click 17 advertising. In addition to this calculation, Outsell also sets forth a methodology to calculate the 18 total revenue attributable to traditional Click Fraud and Distribution Fraud during the Class Period. 19 According to that methodology, the 21.5% figure is multiplied by Yahoo!’s total revenue received

20 from advertisers purchasing pay-per-click advertising from Yahoo!. Because Yahoo! does not break 21 out pay-per-click advertising revenue in its SEC filings, Outsell estimated what percentage of 22 Yahoo!’s Marketing Services Revenue – which is broken out in Yahoo!’s SEC filings – is

23 attributable to pay-per-click advertising by analyzing trends in Yahoo!’s 2002 through 2006 SEC 24 filings and modeling the effect of Yahoo!’s acquisition of Overture, whose revenue was virtually 25 100% derived from pay per click advertising. With Outsell’s experience analyzing components of

26 information companies’ revenue developed over many years, Outsell estimated that Yahoo!’s 27 revenue from pay-per-click advertising is 33%, 35% and 38% of Yahoo!’s total Marketing Services 28 Revenue from 2004, 2005 and 2006, respectively. Thus, to calculate the percentage of non-billable

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1 revenue recognized as a result of click fraud for each quarter of the Class Period, as well as the Class 2 Period as a whole, it is appropriate to apply the 21.5% click fraud rate to 33%, 35% and 38% of 3 Yahoo!’s total Marketing Services revenues to the applicable quarters of 2004, 2005 and 2006, 4 respectively. Applying 21.5% as improperly billed to these percentages of Yahoo!’s 2004, 2005 and

5 1 Q 06 Marketing Services revenue reported, Yahoo! improperly inflated reported revenue and EPS

6 during the Class Period by at least $680 million. See ¶¶259-274.

7 JURISDICTION AND VENUE 8 60. The claims asserted herein arise under and pursuant to §§ 10(b), 20(a) and 20A of the 9 1934 Act (15 U.S.C. §§78j(b), 78t(a) and 78t-1) and Rule 10b-5 promulgated thereunder by the SEC

10 (17 C.F.R. §240.10b-5). 11 61. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 12 §1331 and §27 of the 1934 Act (15 U.S.C. §78aa). 13 62. Venue is proper in this District pursuant to §27 of the 1934 Act and 28 U.S.C. 14 §1391(b). Yahoo! maintains a major place of business in this District and many of the acts and 15 practices complained of herein occurred in substantial part in this District. 16 63. In connection with the acts in this Complaint, defendants, directly or indirectly, used 17 the means and instrumentalities of interstate commerce, including, but not limited to, the mails, 18 interstate telephone communications and the facilities of the national securities markets. 19 BACKGROUND TO THE CLASS PERIOD

20 64. Yahoo! began in 1994 as a guide in a Stanford campus trailer which kept track of 21 David Filo’s and Jerry Yang’s personal interests on the internet. Their list of favorite links on the

22 internet, broken down by category, evolved into the core concept behind Yahoo! Soon hundreds of 23 people were accessing their guide which provided a single place to find useful websites. When 24 Yahoo! celebrated its first million-hit day in the fall of 1994, which signified almost 100 unique 25 visitors, Filo and Yang knew they had a potential business on their hands. In March 1995, Yahoo! 26 incorporated and received an initial investment of nearly $2 million from Sequoia Capital, a well-

27 regarded investment firm. 28

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1 65. At the time of incorporation, Yahoo!’s online business model was a human-edited 2 directory where human editors would hand pick and review submissions of websites to determine 3 their inclusion in the Yahoo! directory. These selected sites were then searchable by Yahoo! 4 visitors. Around the same time, Google’s founders, Larry Page and Sergey Bin, were developing a 5 crawler-based search engine that scoured the web to provide up-to-date data by creating a copy of all 6 the visited pages for later processing by the search engine that would index the down-loaded pages 7 to provide faster searches. In addition, Google’s founders created a breakthrough algorithm, or 8 ranking system, that rewarded links that came from sites that were more important while penalizing 9 those that did not. In essence, more popular sites rose to the top of Google’s annotation list while 10 less popular sites fell to the bottom. Yahoo!’s search engine at that time did not have the ability to 11 rank websites by popularity. 12 66. In April 1996, Yahoo! launched a highly successful IPO with a total of 49 employees, 13 raising $33.8 million. From 1996-1998, Yahoo! partnered with AltaVista, a crawler based engine, to 14 supplement its human-edited directory to obtain search results. In 1998, Yahoo! switched from 15 AltaVista and partnered with Inktomi.com to supplement its search results. Inktomi was the leading 16 developer of web search technology at that time, a web search powerhouse known for its large index 17 and fast search technology. In June of 2000, Yahoo! terminated the Inktomi partnership in favor of 18 Google’s increasingly superior web technology.

19 67. The ability of an internet advertiser to pay for placement in search engine results was

20 first pioneered in 1998 by the search site, GoTo.com – renamed Overture Services, Inc. in 2001. 21 The Overture paid listing product enabled advertisers to bid “auction-style” to pay on a per-click 22 basis for specific “keywords” or phrases in order for their advertisement to appear at the top of 23 search results for the purchased keywords. Each keyword in the Overture system had its own 24 specific ad, with its own unique title, description and landing page. Most importantly, each keyword 25 had its own individual “click price,” or dollar value that was determined through the bidding process. 26 68. Pricing for the keyword was determined by the competitiveness of the keyword – the 27 more desirable the keyword, the more expensive the click price for that keyword. For example, the 28 keyword “mesothelioma” could cost as much as $100 dollars per click, whereas the keyword

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1 “Oakland laundromat” could cost as little as $0.25 per click. In 2001, the minimum bid requirement

2 for the Overture system was $0.10 per click. One drawback of the strict bid-to-rank auction system 3 at Overture was that advertisers with deep pockets could pay the most for the keyword to place their 4 advertisement in the top position even though it was not relevant to the keyword being searched, 5 which resulted in less revenue for Overture because fewer users clicked on the ad. Additionally, 6 Overture’s process to discover and weed out these types of advertisements was manual, not 7 automated, and therefore a cumbersome and inefficient process. 8 69. The Overture Advertising Platform – the actual technological system used by 9 advertisers to open and manage their PPC accounts – had a number of inefficiencies. Many aspects 10 of the account management process, such as adding keywords, required significant human 11 involvement. Because human editors were responsible for reviewing advertisers’ keyword choices 12 and ad placements, the system was slow for new advertisers to sign onto and incapable of scaling 13 quickly. In addition, the actual functionality of the web interface was slow and difficult to use. 14 70. In October 2000, four months after its partnership with Yahoo! began, Google began 15 selling keywords. Google’s “AdWords product,” was its first foray into pay-for-placement

16 advertising. The ads were text-based to maintain an uncluttered page design and to maximize page 17 loading speed. Keywords were sold with bids starting at $0.05 per click. Unlike the Overture 18 pricing model, with AdWords advertisers paid a set price for 1,000 impressions or showings of their 19 advertisement on search page results. At this time, Google’s popularity as a search engine was

20 increasing and it achieved a major increase in revenue from the AdWords product. 21 71. Yahoo! survived the dot-com bubble although the Company reported huge losses in 22 2001 and underwent a number of management reorganizations in an effort to restore the Company to 23 profitability and restore value to its crushed stock. In 2001, Terry Semel – a legendary Hollywood 24 dealmaker – became Chairman and CEO of the Company in a move greeted with widespread 25 skepticism given his lack of technical experience or expertise in the high-tech corporate world.

26 Semel assembled a new management team: Susan Decker as CFO, Daniel Rosensweig as COO, with 27 Farzad Nazem remaining as Chief Technology Officer. Due to the collapse in Yahoo!’s stock and 28 the widespread doubts as to Semel and his team’s ability to restore the Company’s growth, the

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1 defendants were all under very considerable pressure to produce profitable growth in the business – 2 and upward movement in its stock price – or face ouster from their lucrative jobs. Semel also got a 3 huge pay package that was options heavy and tied to the performance in Yahoo!’s stock. In addition 4 to these external pressures to perform, these key insiders (and Yahoo!’s entire management team) set 5 themselves up to pocket hundreds of millions of dollar in bonuses and stock option profits if they 6 could push Yahoo!’s stock price much higher.

7 72. In November 2001, Yahoo! partnered with Overture in an attempt to share in some of 8 the “paid search” revenue Google was enjoying from its AdWords product. Overture’s top five paid, 9 or “sponsored” listings would be shown in search results in a clearly marked section separate from 10 Google results and from Yahoo! directory results. The benefit from this partnership was twofold. 11 Yahoo! benefited because it had an instant revenue source whereby it would receive a percentage of 12 the per-click value of the traffic it was sending to Overture advertisers without incurring any 13 overhead expense. Overture advertisers suddenly had a major source of new traffic to their ads, 14 increasing the advertisers’ base of customers and overall ad value. This new source of traffic thus 15 increased revenue for both Yahoo! and Overture advertisers. 16 73. Three months later, in February 2002, Google converted its AdWords system to a 17 PPC model which allowed Google’s advertisers to bid on a per-click basis just like Overture’s 18 advertisers. More importantly, Google ranked search results on a web page not only by the “bid 19 price,” like Overture, but also based on the advertisement’s CTR. CTR measures how often a user

20 clicks on an advertisement and is calculated by dividing the number of clicks by the number of 21 impressions.

22 74. This CTR innovation resulted in more revenue for Google because the ads were better 23 targeted to the users’ queries and therefore got more clicks. As a result, Google’s system responded 24 quickly to ineffective ads; they disappeared. Google, unlike Overture, developed an automated

25 system for advertisement management, i.e., the ad platform, for advertisers to bid on keywords 26 online rather than relying on human editors to review and approve the ads. Google’s system used its 27 own crawler-based technology as the method by which advertisements were reviewed and approved. 28 Because human intervention was not required, the advertiser sign-up process was faster. Google’s

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1 massive database tracked effective advertisements and tracked information it could pass along to 2 customers to help them create better campaigns. Google’s system outperformed Overture in every 3 way. 4 75. Desperate to compete with Google’s great search innovations, Semel tried to acquire 5 Google in the summer of 2002 for roughly $3 billion, but the young internet firm was not interested. 6 Semel’s backup plan was for Yahoo! to go out and buy its own top-notch search engine and its own 7 search advertising technology to beat Google in the emerging area of search advertising. In 8 December 2002, Yahoo! acquired Inktomi (the search engine) for $257 million and in mid-2003

9 bought Overture (the search-advertising technology) for $1.63 billion to form Yahoo! Search 10 Marketing. Many believed Inktomi was the second-best search engine to Google. Integrating 11 Inktomi and Overture with Yahoo!’s existing system proved difficult. Semel had to convince 12 Yahoo!’s engineers that adapting existing technology from Inktomi and Overture was better than

13 building their own versions from scratch. After Yahoo! announced its purchase of Inktomi and 14 Overture, Semel told investors, consumers and employees that Yahoo! would be the most trafficked 15 site on the internet, with the best search for consumers and the most effective advertising for 16 customers. 17 76. In 2003, Google rolled out AdSense, a revolutionary new content match product that 18 not only had superior and automatic matching capability but was offered to millions and millions of 19 bloggers and smaller players rather than larger corporate users. Google’s superior search engine

20 crawled the content or text of the ad to analyze the subject matter and match the advertiser keywords 21 to show highly relevant ads next to the content selected by users. Overnight this upgrade generated 22 hundred of millions of clicks and therefore, hundreds of millions of dollars in revenue to Google. 23 77. At the time Yahoo! purchased Overture, Overature had three search products: 24 Sponsored Search, Content Match and Domain Match. Sponsored Search was the existing core 25 research product and the reason Yahoo! purchased Overture. With Sponsored Search, 26 consumers/internet users input search terms to acquire listings of a particular product or service. 27 Yahoo! advertising customers would “bid for position.” Yahoo! advertising customers who signed 28 up for Sponsored Search were automatically enrolled in Content Match and Domain Match.

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1 78. In June 2003, one month before Yahoo!’s acquisition of Overture, Overture launched 2 Content Match, its contextual advertising product, to compete with Google’s AdSense. At that time, 3 Content Match was only offered to Yahoo!’s “enterprise customers” who included larger corporate

4 users such as NewYorkTimes.com and CNN.com. Yahoo! made agreements with these clients to 5 share revenue for clicks on Yahoo! ads that would appear next to articles on the enterprise 6 customers’ website. The intent was for the ads to be contextually relevant to the content of whatever 7 articles were displayed on the page. When any internet user reviewed text pages on any Yahoo! 8 enterprise partner site, Content Match ads from Yahoo search customers or advertisers appeared on 9 those pages. Additionally when an internet user on Yahoo! or any search provider searched a topic, 10 a list of articles would appear on the page relating to that topic. If the user clicked on an article 11 which appeared on an enterprise customer site, advertising links to Yahoo!’s advertising customers 12 that were related to the topic would appear to the side of the page. 13 79. The enterprise partner would receive a share of the revenue Yahoo! received for the 14 click. Yahoo! gave the enterprise partner a piece of code to attach to each of their articles and this 15 code identified the enterprise partner and served as the partner’s Yahoo! account number for the 16 purpose of splitting revenue. For example, when an internet user viewed a CNN.com article and 17 clicked on an ad on that page, the code identified what user was reading the CNN article, and the 18 revenue from that click was shared between Yahoo! and that partner. Additionally, if a user on the 19 CNN website did a keyword search using CNN.com ’s search bar they would see Yahoo! sponsored

20 search results, and CNN would share in the revenue from clicks on those ads. 21 80. Yahoo!’s Content Match system was a much lower quality system than Google’s and 22 from the beginning was not built with the proper requirements. Yahoo’s system utilized a search 23 engine far below Google’s capabilities. Yahoo!’s system was poor at analyzing text and pulling the 24 terms or keywords that would match the keywords bid on by Yahoo!’s advertising customers. 25 Yahoo!’s system often identified terms that did not properly capture the content of the article which 26 then caused irrelevant ads to be placed next to the results of the contextual searches. The more 27 irrelevant the ad, the less likely any click traffic would produce sales. Yahoo!’s advertisers were 28 automatically enrolled in Content Match per their contract with Yahoo! and were billed the same rate

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1 for clicks that came from contextual matches as opposed to sponsored keyword searches. 2 Advertisers began complaining to Yahoo! because their advertising costs increased from the poor 3 quality traffic and their conversion rates declined. 4 81. Domain Match enabled Yahoo!’s search advertising customer ads to be shown on 5 sites that “partnered” with Yahoo!. Search advertising customer ads were automatically shown on 6 pages of Yahoo! partners once the partnership was made. Yahoo! advertising customers were not 7 given the choice to opt out of this search product. When an internet user visited a Domain Match 8 partner site, the user would see various Yahoo! ads listed on the site. If the user clicked on one of 9 the ads, the Domain Match partner would share in the click revenue with Yahoo!. Yahoo! charged 10 its advertising customers the same price-per-click price as Sponsored Search clicks. Yahoo! did not 11 tell its customers that their ads were republished on these sites and that the traffic was of a lower 12 quality than clicks that came from Sponsored Search. 13 82. Following positive quarter results throughout 2003, on January 14, 2004, Yahoo! 14 reported very strong 4Q 03 and FY 03 results. In a conference call with investors following the 15 earnings release, Semel stated: 16 [W]e have successfully integrated our algorithmic search resources to assemble a world-class team that plans to continue to innovate and build the most relevant and 17 comprehensive search experience on the web. 18 * * * 19 This performance is a result of growing contributions from our brand advertising, as advertisers become increasingly satisfied with the results of online 20 advertising and the benefits of our integrated marketing solutions, as well as continued strong growth in sponsored search. 21 * * * 22 In the broader area of pay for performance advertising, which has migrated 23 into additional forms of contextual advertising beyond sponsored search, we benefited from the rapid growth in the category, as businesses of all sizes took 24 advantage of this affordable channel to acquire customers. 25 * * * 26 The integration of the Yahoo! and Overture operations is proceeding according to plan, we’re excited about the progress we’re making testing and 27 implementing Overture’s content match product into Yahoo! verticals, such as entertainment, finance, travel and yellow pages, with many other verticals to come. 28

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1 83. By early 2004, Yahoo had integrated Inktomi’s search engine well enough to drop 2 Google as its search technology provider and declare independence as a search engine. On February 3 18, 2004, Yahoo! announced the introduction of its own new search algorithm, thus ending its prior 4 relationship with Google, where Yahoo! had licensed – and thus depended upon – Google’s search 5 algorithm for placing sponsored/paid search ads. Yahoo!’s release, entitled “Yahoo! Introduces 6 More Comprehensive and Relevant Search Experience with New Yahoo! Search Technology,” 7 stated that: 8 Yahoo! Search ha[d] combined its own proprietary anti-spam technology . . . to help filter out irrelevant, redundant or low-quality URLs and links,” [that] [t]aking 9 advantage of the synergies between Yahoo! Search and Yahoo! Mail, these two services [would] share data to reduce spam and further improve the user experience 10 across Yahoo!. 11 84. Just before the beginning of the Class Period, in late March 2004, Yahoo! issued its 12 2003 Annual Report – which contained a letter from Semel, stating:

13 The integration of the Yahoo! and Overture operations has proceeded well, and the combination seems even more compelling than we initially thought. We’re excited 14 about our progress in testing and implementing Overture’s Content Match product into Yahoo! properties, such as Entertainment, Finance, Travel and Yellow Pages, 15 with many other verticals to come. 16 85. The 2003 Annual Report also stated: 17 Yahoo! . . . [was] offer[ing] highly-targeted marketing opportunities . . . designed to deliver greater value to advertisers through more focused audiences. 18 * * * 19 Content Match allows businesses to place listings on more locations on the Web and 20 drive more traffic to their sites. Content Match displays listings when Internet users are viewing related content on the Yahoo! network or our affiliates’ pages. For 21 example, if the user is reading an article about interest rates, he or she could find links on the side of the page for mortgage-related advertisers. Similarly, users who 22 are researching vacation plans may see listings for hotels and rental car agencies. 23 86. Despite these positive statements, defendants knew the Overture system was a 24 disaster from the beginning. The Overture system needed a major technological overhaul: the 25 original technology had been created in a hurry during the internet boom and it wasn’t built to work 26 on a global scale. Overture was also painfully slow compared to Google because on the ad platform 27 side it was designed to allow the human review of each ad. Meanwhile Yahoo! executives and 28 engineers could not decide whether to merge Overture with Yahoo!’s operations or let it remain

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1 quasi-independent. And finally, what had previously been a clean source of revenue for Overture 2 (with no overhead) by way of its previous sponsored listing partnerships, became a new and 3 significant operating expense that instantly cut into profit margins.

4 87. Yahoo! knew from the low CTR on Content Match that its search engine was 5 inadequate and required improvement. Yahoo! changed the system so that the enterprise customers’ 6 own text editors were asked to attach key words along with their account code to each article 7 available for contextual searches. Instead of relying on the inadequate search engine to analyze 8 content it was now relying on human editors to identify the subject of the articles and select the 9 keywords. The manual process had an inherent disconnect between keywords selected by the 10 enterprise partner editors in analyzing the content of the text and the keywords bid on by Yahoo! 11 enterprise advertisers.

12 88. As the investment community eagerly awaited Yahoo!’s important 1 Q 04 results, and 13 anticipated a very positive earnings report and commentary about Yahoo!’s business, the stock 14 moved up from $20.88 on March 15, 2004 to a 52-week high of $25.50 on April 5, 2004.

15 CLASS PERIOD EVENTS, CONDUCT AND MISSTATEMENTS 16 89. The statements made by defendants set forth in ¶¶82-88 were alive and reflected in 17 the market price of Yahoo!’s stock at the beginning of the Class Period.

18 On April 7, 2004 Defendants Issued False and Misleading Statements About Yahoo! ’s 1Q 04 Financial Results, the Success of Overture’s Integration and the Company’s New 19 Content Match 20 90. On April 7, 2004, Yahoo! reported its highly anticipated 1Q 04 results – its first 21 quarter of operations, based on its own sponsored/paid search algorithm via a release, stating: 22 Company Posts Revenues of $758 Million, Operating Income of $132 Million, Operating Income Before Depreciation and Amortization of $211 Million 23 Yahoo! Inc. (Nasdaq: YHOO) today reported results for the first quarter 24 ended March 31, 2004.

25 “Yahoo!’s performance surpassed even our high expectations, delivering the most successful quarter in the Company’s history,” said Terry Semel, chairman and 26 chief executive officer, Yahoo!. “With our products more popular than ever before, we have experienced success across our entire business including strong growth in 27 our fee-based and marketing services.” 28

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1 • Revenues were $758 million in the first quarter of 2004, compared to $283 million in the same period of 2003. 2 • Marketing services revenue for the first quarter of 2004 totaled $635 million, 3 a 235 percent increase from the $190 million reported in the same period in 4 2003.

5 • Revenues excluding traffic acquisition costs (“TAC”) were $550 million in the first quarter of 2004, compared to $283 million for the same period of 6 2003.

7 • Gross profit for the first quarter of 2004 was $476 million, compared to $240 8 million for the same period of 2003.

9 • Net income for the first quarter of 2004 was $101 million or $0.14 per diluted share (which included $0.01 per diluted share related to the one-time gain 10 from unredeemed third party loyalty program that expired during the quarter), compared with $47 million or $0.08 per diluted share for the same 11 period of 2003. 12 91. On April 7, 2004, Yahoo! held a conference call for analysts, shareholders and the 13 financial media in which Semel, Decker and Rosensweig participated. During the call, the following

14 information was disseminated to the markets: 15 Terry Semel – Yahoo, Inc. – Chairman, CEO 16 * * * 17 In the first quarter, Yahoo! generated $758 million in revenue, our fourth 18 straight quarter of record revenues .... Operating income before depreciation and amortization was $211 million . . . . Yahoo! delivered GAAP earnings per share of 19 14 cents in the quarter ....

20 * * * 21 In the broader area of pay-for-performance advertising, we experienced rapid growth as businesses of all sizes took advantage of this affordable channel to acquire 22 customers.... This was aided by our global introduction of Yahoo! Search Technology, an expansion of sponsored results across key verticals. Also 23 contributing to the growth was the introduction of new products such as content match across the Yahoo! network and to Overture’s distribution partners. 24 * * * 25 Sue Decker – Yahoo, Inc. – CFO 26 * * * 27 Overture’s made a choice to focus on paid clicks and driving overall revenue per 28 search up, and that’s why it’s introduced a number of newproducts, content match

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1 being one, along with new verticals and expanded its coverage, so the overall volume of clicks that we’re seeing is very, very significant increase, and that’s a 2 strategy we plan to have in place for the foreseeable future. 3 92. Yahoo!’s much better-than-expected 1 Q 04 results received widespread attention in 4 the financial press. For instance, on April 8, 2004, the New York Times reported: 5 Yahoo Reports a Surge In Quarterly Earnings . . . . 6 Shares of Yahoo rose more than 10 percent in after-hours trading . . . . 7 * * * 8 “All the pieces are coming together,” Mr. Semel said in an interview yesterday. In the first quarter of this year, Yahoo earned $101 million, more than 9 double the $47 million it earned in the same quarter a year ago. That comes to 14 cents a share, well above the 11 cents analysts had expected. 10 * * * 11 Mr. Semel said that the company was sharply increasing its spending on 12 product development. In the first quarter, it replaced Web search results provided by Google – which has become Yahoo’s biggest competitor – with its own Web search 13 system. Mr. Semel said that the switch was technically smooth and increased the satisfaction of users. 14 93. Yahoo!’s stock, which closed on April 7, 2004 at $24.18, now soared higher on April 15 8, 2004, to as high as $28.12 per share on volume over 90,000,000 shares, three to four times the 16 average daily volume, and continued to trade at artificially inflated levels. 17 94. Yahoo!’s 1 Q 04 results were later filed with the SEC in Yahoo!’s 1 Q 04 10-Q Report, 18 signed by Decker. This 10-Q Report contained Yahoo!’s false 1Q 04 financial results, including 19 those previously publicly reported. The 10-Q also contained the false Sarbanes-Oxley certificates 20 and statements about Yahoo!’s internal controls signed by defendants Semel and Decker (see ¶¶292- 21 295). 22 95. Defendants’ statements regarding Yahoo!’s 1 Q 04 financial results and the success of 23 integrating Overture and the new Content Match program contained in ¶¶90-92 and 94 were 24 materially false and misleading when made. The true facts which were known to or recklessly 25 disregarded by defendants were as follows: 26 (a) Contrary to defendants’ statements such as: “We experienced rapid 27 growth . . . aided by . . . the introduction of new products such as content match” (¶91), “[a]ll the 28

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1 pieces are coming together” (¶92), and “the switch [from Google search] was technically smooth and

2 increased the satisfaction of users” (id.), as of April 7, 2004, the Overture search platform was 3 actually overloaded and in need of additional servers and resources, the request for which was 4 denied by Yahoo!’s corporate headquarters, causing system shutdowns and increased customer 5 dissatisfaction. According to CW11, following Yahoo!’s acquisition of Overture, the Overture 6 platform was incapable of handling the increasing numbers of advertisers, marketing partners and 7 users overloading the system from Yahoo!. Compounding the problem was that even though the 8 increasing traffic from Yahoo! was literally causing the Overture system to periodically shut down, 9 and despite the critical nature of that system to Yahoo!’s overall business performance (accounting 10 for 50% of Yahoo!’s revenue), Yahoo!’s corporate headquarters refused to provide the Overture 11 Pasadena facility with adequate resources to deal with the increased Yahoo! traffic. CW11 12 confirmed that customers were in fact unable to access their accounts for days at a time due to the 13 increased Yahoo! traffic beyond the capacity of Overture’s platform. According to CW10, CW11, 14 and CW12, a culture clash between Yahoo!’s Sunnyvale engineers and Overture’s Pasadena

15 engineers occurred following the Overture acquisition that adversely impacted Yahoo!’s ability to 16 smoothly integrate Overture. To address the increasing Yahoo! traffic, Overture engineers requested 17 that Yahoo! provide funding for additional servers to handle the increasing traffic. As CFO, 18 defendant Decker controlled whether Yahoo! spent the money necessary to upgrade the Overture 19 search platform and the hardware that supported it. According to CW 10, not only did Yahoo! refuse

20 to provide additional funding for servers, the Sunnyvale office (Yahoo!’s corporate headquarters) 21 ultimately decided to terminate dozens of legacy Overture engineers, even though those engineers 22 were most knowledgeable about how the Overture information systems operated. As was confirmed 23 by CW 12, the decision to terminate the senior legacy Overture engineers had dramatic and adverse 24 consequences on Yahoo!’s ability to develop the new technology necessary to handle the ever 25 increasing Yahoo! traffic on the overloaded Overture paid search platform. CW3 stated that 26 Overture’s paid search technology had to be improved in order for Yahoo! to even compete with 27 Google’s revenue per search. According to both CW10 and CW12, the Yahoo! team assigned to 28 replace the terminated legacy Overture engineers underestimated the size and complexity of

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1 integrating Overture, and as a result “stalled, delayed and derailed” the attempts to develop a new 2 search platform. Furthermore, CW15 confirmed that upon Yahoo!’s acquisition of Overture, 3 Overture’s search technology was incapable of processing the huge volume of Yahoo! traffic. 4 CW 15 was aware of the inadequacy of the search technology Yahoo! acquired via Overture through 5 his/her participation in management meetings. Given that following its acquisition, the Overture 6 business added $900 million to Yahoo!’s yearly revenue, the Individual Defendants were compelled 7 to keep track of its status, including the progress (or lack thereof) of creating a new and improved 8 search platform.

9 (b) Contrary to defendants’ statements on April 7 and 8, 2004 (¶¶91-92), the 10 integration of the Overture platform into Yahoo!’s business model and massive user traffic was not 11 technically smooth and in fact caused increased user dissatisfaction. According to CW 10, Yahoo! 12 refused to provide sufficient funding for additional servers, which impacted his/her teams’ ability to 13 analyze data relating to searches and clicks for customers, resulting in Yahoo!’s failure to provide 14 meaningful data pursuant to the terms of the Service Level Agreements (“SLA”). The data provided 15 to advertising customers had to be analyzed by numerous teams that reported to CW 10 and was 16 derived from numerous sources before it was forwarded to clients. Some of the important functions 17 performed by the various teams supervised by CW 10 were hampered by Yahoo!’s refusal to provide 18 adequate resources, and included the calculation of “discard rates” by analyzing which clicks should 19 not be passed on to advertisers and thus eliminated from billing, as well as “conversion rates”

20 advertisers experienced from users who clicked on their ads and ultimately resulted in a sale. The 21 discard rates were supposed to be analyzed for each marketing partner to determine whether they 22 were poor quality partners.

23 (c) Yahoo!’s decision to terminate the senior legacy Overture engineers who were 24 the most knowledgeable about how and why Yahoo! needed to improve the search algorithm and 25 bidding system so that Yahoo! could compete with Google also impacted Yahoo!’s switch to its own 26 search technology, and this switch, along with the integration of the Overture platform, was not 27 technically smooth as defendants stated (¶92). Following the acquisition of Overture and switch 28 from Google’s search engine, Yahoo! rushed to market its new Content Match product before it

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1 functioned properly. According to CW 12, within six months of Google’s release of AdSense in June

2 2003, a similar but superior technology to Content Match, Google began – and continued – to take 3 significant market share from Overture and then Yahoo!. Contrary to defendants’ April 2004

4 statements (¶¶91-92), Yahoo! rushed Content Match to market with a completely manual mapping 5 process that led to wide variations in search results, and ultimately increased user dissatisfaction. As 6 CW 12 stated, rather then compete with Google’s AdSense, Yahoo! lost customers to Google because 7 Content Match generated poor and irrelevant traffic, in part based on Yahoo!’s continued 8 relationships with low quality partner sites. Defendants’ statements that the launch of Content 9 Match was contributing to a large increase in the volume of clicks (¶91) were false and misleading 10 because many of these clicks should have been non-billable to the customer, with Yahoo! 11 recognizing no revenue from those clicks. Content Match produced undesirable results such as 12 irrelevant clicks, as well as large volumes of clicks that should have been filtered out as resulting 13 from click fraud. According to CW8, following Yahoo!’s acquisition of Overture, the click traffic 14 from Content Match increased exponentially and there was a higher incidence of paid ads appearing 15 next to irrelevant site content. CW8 described Content Match as a low quality product that had 16 operating problems since its inception and throughout the Class Period, causing irrelevant ad 17 placement and resulting in customer complaints about increased costs due to poor quality traffic. 18 CW8 stated Yahoo!’s advertising customers were automatically enrolled in Content Match during 19 the Class Period and were billed the same price for the poor quality clicks generated from Content

20 Match as those generated from sponsored keyword searches. According to CW8, Content Match 21 produced low quality traffic because, first, users doing searches were not doing so with the intention 22 of purchasing anything, whereas users doing searches utilizing sponsored searches generally had a 23 greater degree of intent to buy something. When contextual searchers did click in ads appearing next 24 to articles on a given site, those clicks were more random than a click on a sponsored search result, 25 for example because the user thought there was something in the ad relevant to the content being 26 viewed, or for example the user was just “browsing” when he or she clicked on the ad. These were 27 clicks that occurred “without intent to buy,” and were considered low quality. Second, the more 28 irrelevant an advertisement was that appeared next to a site’s content, the less likely any click traffic

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1 would produce sales. Following the release of Content Match, CW11, as an advertising account 2 manager, was aware of Yahoo! sales personnel routinely receiving complaints from angry customers 3 regarding the bad matching leading to irrelevant clicks and the charges for clicks that should have 4 been non-billable and were known to have occurred by CW8 and CW11. According to CW8 and 5 CW 11, “click tsunamis” were another result of the bad matching process within Content Match that

6 angered customers and resulted in Yahoo! recognizing revenue from clicks that should have been 7 non-billable. CW11 explained that a click tsunami occurred when a search mapped to results that 8 caused thousands of clicks on an advertiser’s site with little or no conversion to the sale of a product. 9 CW 11 provided an example of a click tsunami such as when a mortgage seller’s ad would appear on 10 a news article announcing a Federal Reserve interest rate cut. A large volume of readers would click 11 on an ad next to the article thinking they would obtain more information about what impact the 12 Federal Reserve’s action would have on mortgage interest rates and instead clicked through to the 13 mortgage seller’s website. Because Yahoo!’s Content Match system failed to prevent the resulting 14 onslaught of clicks that should have been non-billable, the small advertiser who may have only 15 budgeted for $200/day would receive billing for thousands of dollars, far exceeding the budget or 16 capacity to pay.

17 (d) Yahoo!’s launch of Content Match also led to customers being forced to pay 18 for clicks that should have been non-billable that occurred on international partner sites, thus 19 decreasing customer satisfaction. CW10 confirmed that Yahoo! had a large problem with poorer

20 quality international partners and that these problems notwithstanding, Yahoo! would not allow 21 advertising customers to opt out of international partner traffic up to the time s/he left Yahoo!. 22 While CW 10 worked for Overture prior to that company’s acquisition by Yahoo!, Overture routinely 23 “turned off” poorer quality partners who had unacceptable “discard rates.” Overture maintained

24 high standards and maintained score cards for partners to ensure high conversion rates by customers. 25 Following the Overture acquisition, Yahoo! was not as concerned with the quality of the traffic from 26 marketing partners, and failed to investigate or screen Content Match partners before allowing them 27 to display Yahoo! customer advertisements. According to CW8, each Individual Defendant received 28 regular reports detailing the performance of and issues associated with Content Match, as well as

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1 Domain Match, from the managers that oversaw the everyday issues associated with these 2 advertising products – Tim Cadogan, Jeff Weiner, Ted Meisel, and Bill Demas. Furthermore,

3 defendants Rosensweig and Decker were aware of the revenue quality problems associated with 4 Content Match and Domain Match, as Rosensweig was informed of these issues by the four 5 managers overseeing the products (Cadogan, Weiner, Meisel, and Demas), and passed the 6 information along to defendant Decker to handle the financial aspect of the problems.

7 (e) CW 17 confirmed the poor matching qualities of the Content Match program. 8 Upon its launch and throughout the Class Period, advertisements were being placed on websites that 9 contained content irrelevant to the advertising. CW 17 provided an example of the program’s poor 10 matching capabilities, such as when an advertisement for appliance repair was inappropriately placed 11 on a travel website. In such instances of irrelevant matching, Yahoo!’s Content Match customers 12 were charged for clicks on their advertisements placed in these unrelated websites, even though 13 visitors to those websites were not seeking the advertised services or products, and as such were 14 unlikely to purchase those services or products even if they did click on the advertisement. Thus, 15 Yahoo! recognized revenue for a click on such an advertisement even though the click should have 16 been non-billable, as the ad was placed on an irrelevant website, contrary to the purpose of Content 17 Match advertising.

18 (f) According to CW3, at least through October 2004 when s/he left Yahoo!, the 19 Company took no efforts to ensure its Content Match partners were of good quality and thus less

20 likely to generate revenue from clicks that should have been non-billable. CW3 confirmed Yahoo!’s 21 Content Match partners were essentially “self sign-up” partners, consisting of anyone who had a 22 blog site or website who sought to partner with Yahoo! via Content Match in order to generate 23 revenue. CW3 stated these partners, the quality of whom Yahoo! neither investigated nor screened, 24 were more willing to engage in or allow click fraud on their sites because they had less to lose than 25 the more reputable search advertisement partners, and thus their own revenues from Yahoo! would 26 be bolstered. At the same time, Yahoo! shared part of the revenue from each click, including clicks 27 that should have been non-billable because the advertisements were placed next to irrelevant content. 28 CW6 confirmed that throughout the Class Period, the main reason for customers’ complaints was the

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1 bad mapping technology of Content Match, which resulted in customer ads appearing in irrelevant 2 places.

3 (g) Also contributing to customer complaints and Yahoo!’s recognition of 4 revenue from clicks that should have been non-billable was Yahoo!’s practice of billing customers 5 based on the estimated, versus actual, number of clicks. CW5 confirmed that from April to June 6 2004, Yahoo! billed advertising customers on an invoicing system based on an estimated number of 7 clicks, versus the actual number of times a user clicked on their ad. Customers could ascertain the 8 discrepancy between Yahoo!’s estimate and the actual number of clicks by tracking clicks on their 9 ads throughout a billing cycle on a system to which advertisers had access. Based on regular 10 discussions between CW5 and a Global Credit and Collections Manager, his/her direct supervisor, 11 customers complained about this issue at least once or twice per day, and this manager regularly met 12 with defendant Decker, as was known to CW5 based on shared calendars and instant messaging. 13 (h) In combination, Yahoo!’s failure to accurately account for non-billable clicks, 14 the unorganized and ill-equipped integration of Overture, the termination of the most senior Overture 15 engineers, the failure to provide adequate resources to Overture, and Yahoo!’s decision to rush the 16 poorly developed Content Match to market all had a disastrous impact on Yahoo!’s business 17 performance. As a result, the Company’s paid search revenues stagnated. This development put 18 defendants in a bind because they were desperate to demonstrate growing search ad revenues and 19 meet the high end of or exceed their guidance to securities analysts. Therefore, defendants

20 developed ways to recognize ad search revenue they had not earned because it was outside the scope 21 of properly billing Yahoo! advertising customers for clicks on their advertisements. According to

22 CW12, who was employed by Overture and then Yahoo! throughout the Class Period, Yahoo!’s 23 recognition of revenue from clicks that should have been non-billable, known across the industry as 24 click fraud, occurred throughout the Class Period. To accomplish this, particularly at the end of a 25 quarter, defendants permitted non-billable click activity to be passed on to customers, thereby 26 increasing the Company’s revenues. According to CW 12, the non-billable click activity was being

27 allowed through the click detection system and passed on to advertising customers in the form of 28

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1 charges to their accounts, which naturally resulted in increasing numbers of complaints from 2 advertising customers. 3 (i) As detailed in ¶¶259-274, during 1Q 04, Yahoo! improperly recognized 4 21.5% of its paid search revenue – which constituted approximately 33% of the total Marketing 5 Services Revenue in 1Q 04 – attributable to click and distribution fraud or $45,150,000, because this

6 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59); 7 (j) As detailed in ¶¶280-282, during 1Q 04, Yahoo! failed to properly record a 8 loss contingency in violation of Generally Accepted Accounting Principles (“GAAP”), as set forth in

9 Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies; 10 (k) As detailed in ¶¶283-291, during 1 Q 04, Yahoo! failed to disclose, as required 11 by SEC Regulation S-K, known trends and uncertainties by not reporting the practice of improperly 12 recognizing revenue generated by click and distribution fraud and thereby not disclosing Yahoo!’s 13 actual financial performance; 14 (l) As detailed in ¶¶292-295, during 1Q 04, Yahoo!’s publicly issued financial

15 statements violated fundamental accounting principles requiring that such statements contain 16 complete and reliable information, presented in a conservative manner regarding how managers 17 discharged their stewardship responsibilities of the Company and the actual financial performance of 18 the Company; 19 (m) As detailed in ¶¶259-274, during the 1Q 04, as a consequence of the

20 aforementioned practices, the Company’s revenues and net income were artificially inflated and 21 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by

22 $45,150,000 and net income was overstated by $0.04 per share. 23 96. With knowledge of the true facts set forth in ¶¶95(a)-(h), defendant Semel sold 24 4,000,000 shares of Yahoo! stock at an average artificially inflated price of $27.47 per share between 25 April 12 and April 16, 2004, reaping total proceeds of $110,024,870.

26 27 28

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1 On May 13, 2004, Defendants Issued False and Misleading Statements About Yahoo!’s Search Marketing Business and Content Match 2 97. On May 13, 2004, Yahoo! held its annual “Analysts Day” at the Ritz-Carlton hotel in 3 San Francisco, an event attended by over 100 members of the financial analyst and media 4 communities and many large (institutional) Yahoo! shareholders. The presentation by the Yahoo! 5 executives was widely reported by analysts and the media to the markets and investors. Yahoo!’s 6 stock increased from $25.76 on May 12, 2004 to $28.10 on May 13, 2004 and over $30 per share a 7 few days later, as this positive information entered the market and was digested and acted on by 8 investors. 9 98. The information disseminated by the Yahoo! executives during presentations and 10 private conversations with analysts during the “Analysts Day” was reflected in the media and 11 analysts’ reports set forth below: 12 • On May 13, 2004, Market Watch reported on Yahoo!’s analyst day and 13 stated:

14 Yahoo expects to be more profitable on annual sales of $5 billion, have 15 million paying subscribers .... * 15 * * 16 Jeff Weiner, senior vice president of search and marketplace, said that the key 17 ingredients needed to be a dominant search engine are strong algorithmic technology, registered users, breadth and depth of content and services, a global presence, brand 18 name and accessibility. Weiner said that Yahoo has high marks in all the areas, with the exception of search brand and accessibility. 19 • On May 14, 2004, Deutsche Bank issued a report entitled, “Bullish Analyst 20 Meeting Reinforces Continued Growth & Margin Expansion – BUY.” That 21 report stated: 22 No Surprise Here – Rapid Growth in Paid Search Continues 23 In his presentation, Ted Meisel indicated that the growth prospects for paid search remain quite strong, and Yahoo! Overture is well-positioned with its tier-ing 24 strategy for search terms. The company has . . . enhance[d] matching technologies to drive higher relevance on search queries. Thus far, the strategy is working . . . . 25 99. Defendants’ statements regarding Yahoo! having a strong algorithmic technology and 26 having enhanced the Company’s matching technologies to drive higher relevance on paid search 27 engines made during the May 13, 2004 annual “Analysts Day” contained in ¶¶97-98 were materially 28

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1 false and misleading when made. The true facts which were known to or recklessly disregarded by 2 defendants were as follows:

3 (a) Contrary to defendants’ statements on May 13, 2004 (¶97), and the statements 4 on May 14, 2004 attributable to Yahoo! (¶98), Yahoo!’s algorithmic search technology as of that 5 time was not strong, and rather was inadequate and problematic. Due to the disaster that was the 6 integration of Overture, coupled with the refusal of Yahoo!’s corporate headquarters to provide the 7 additional and necessary resources to handle the massive Yahoo! traffic, the system periodically 8 crashed and customers were increasingly dissatisfied. The corroborating statements of CW10, 9 CW 11, CW 12, and CW 15 that confirm the weakness of Yahoo!’s search technology as of May 2004

10 are set forth in detail in ¶¶95(a)-(b) above.

11 (b) Contrary to defendants’ statements at the May 13, 2004 Analysts Day (¶97), 12 and the statements attributable to Yahoo! published the following day (¶98), Yahoo!’s matching 13 technology remained poor and led to irrelevant paid search results, particularly in the area of Content 14 Match. The corroborating statements of CW3, CW6, CW8, CW10, CW11, and CW17 confirming 15 the pervasive irrelevance of the placement of customer advertisements, and the resulting charges for 16 clicks that should have been non-billable, are set forth in detail in ¶¶95(c)-(f) above. 17 100. With knowledge of the true facts set forth in ¶¶99(a)-(b), defendant Decker sold 18 600,000 shares of Yahoo! stock at an artificially inflated price of $29.43 per share on May 24, 2004, 19 reaping total proceeds of $17,656,904.

20 Between June 2004 and July 2004, Defendants Issued False and Misleading Statements About Yahoo!’s 2Q 04 Financial Results and Its Search Marketing Business 21 101. On June 9, 2004, defendant Decker appeared at the Deutsche Bank Securities 12th 22 Annual Media Conference 2004 as the guest of Jeetil Patel, self-proclaimed Internet Analyst at 23 Deutsche Bank. Responding to Jeetil Patel’s comment that if “[y]ou look at the industry, about 40% 24 of the industry is actually paid search, 45% display ad, 15% cost side on line,” Decker stated that 25 Yahoo! “wouldn’t quibble with some of the industry estimates out there which have the Sponsored 26 Search category growing a little faster than the brand category,” expressly commenting that “content 27 match is a pretty interesting new product that we just launched and is out there. We can monetize a 28

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1 lot of the content on the Web by targeting on content not just on key words, local, very significant 2 opportunity.”

3 102. On July 7, 2004, Yahoo! reported “record” 2Q 04 results via a release stating: 4 Company Posts Revenues of $832 Million, Operating Income of $149 Million, Operating Income Before Depreciation and Amortization of $234 Million 5 Yahoo! Inc. (Nasdaq: YHOO) today reported results for the second quarter 6 ended June 30, 2004. 7 “Yahoo!’s second quarter results represent another record quarter for the Company and demonstrate continued execution of our core priorities,” said Terry 8 Semel, chairman and chief executive officer, Yahoo!. 9 * * * 10 “Yahoo! is benefiting from its diverse and balanced sources of revenue, which have well positioned the Company to deliver strong, consistent, and profitable 11 growth,” said Susan Decker, chief financial officer, Yahoo!.

12 • Revenues were $832 million for the second quarter of 2004, compared to $321 million for the same period of 2003. 13 • Marketing services revenue for the second quarter of 2004 totaled $691 14 million, a 215% increase from the $219 million reported in the same period 15 in 2003.

16 • Revenues excluding traffic acquisition costs (“TAC”) were $609 million for the second quarter of 2004, compared to $321 million for the same period of 17 2003.

18 • Gross profit for the second quarter of 2004 was $535 million, compared to 19 $275 million for the same period of 2003.

20 • Net income for the second quarter of 2004 was $113 million or $0.08 per diluted share, compared with $51 million or $0.04 per diluted share for the 21 same period of 2003.

22 103. On July 7, 2004, Yahoo! held a conference call for members of the analyst and 23 financial media communities conducted by Semel, Decker and Rosensweig, during which the 24 following exchange occurred: 25 Terry Semel – Yahoo, Inc. – CEO 26 . . . In Q2, we delivered the best quarter in Yahoo!’s history. . . . In fact, the past year has been a period of unprecedented growth with this, our fifth straight 27 quarter of record revenues. . . . . We have an extremely healthy and diversified business model and our two core businesses, advertising and premium consumer 28

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1 services, are both performing very well. . . . In the second quarter, Yahoo! generated a record $832 million in revenue . . . . 2 * * * 3 So let’s now focus on our marketing services business, which achieved a 4 215% year-over-year increase to $691 million in revenue due to both dramatic growth in our organic business and incremental revenue from acquisitions. 5 104. Despite Yahoo!’s apparently strong 2Q 04 report and commentary, because analysts 6 perceived slowing growth, in particular in Yahoo!’s critical search business, Yahoo!’s stock was 7 punished, falling from $33.14 on July 7, 2004 to as low as $29 on July 8, 2004, yet the stock 8 continued to trade at artificially inflated levels as a result of defendants’ false and misleading 9 statements. This sharp decline demonstrated to Yahoo! insiders that to keep the stock price up, as 10 they were determined to do, they had to have Yahoo! report very strong growth and to give greater 11 credibility to their very positive commentary – the market and analyst community would not accept 12 anything less. 13 105. On July 8, 2004, The Wall Street Journal reported: 14 Yahoo Net Soars On Revenue Gain, But Shares Sag – Investors Are 15 Disappointed By Second-Period Results, Its Outlook for All of 2004 16 Yahoo Inc. said second-quarter net income and revenue more than doubled, driven by the Internet company’s online advertising and consumer-service 17 businesses. 18 But Yahoo failed to blow past Wall Street estimates, as some had predicted, and only slightly upgraded its outlook for 2004. . . . Yahoo! shares . . . fell to $28.75, 19 or 12%, in after-hours trading.

20 . . . Yahoo’s profit and revenue were both in line with analyst estimates, as compiled by Thomson First Call. But some investors had come to expect an upside 21 surprise, based on recent history. . . .

22 Advertising-related revenue accounted for 83% of Yahoo’s total revenue . . . .

23 106. On July 8, 2004, the New York Times reported: 24 Yahoo’s Quarterly Earnings Double but Disappoint Investors 25 * * * 26 Terry S. Semel, Yahoo’s chief executive, said in an interview yesterday that he thought the company was performing well. “Our numbers were fantastic,” he 27 said. “Our core business is performing very, very well.” 28

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1 107. Yahoo!’s 2Q 04 results were later filed with the SEC in Yahoo!’s 2Q 04 Form 10-Q, 2 signed by Decker. This Form 10-Q contained Yahoo!’s false 2Q 04 financial results, including those

3 previously reported on July 7, 2004. The 2Q 04 Form 10-Q also contained false Sarbanes-Oxley 4 certificates and statements about Yahoo!’s internal controls signed by defendants Semel and Decker

5 (see ¶¶292-295). 6 108. Defendants’ statements regarding Yahoo!’s 2Q 04 financial results contained in 7 ¶¶101 - 103 and 105-107 were materially false and misleading when made. The true facts which were 8 known to or recklessly disregarded by defendants were as follows:

9 (a) Defendants’ statement that Yahoo! was successfully monetizing content on 10 the internet by targeting content (¶101) was false and misleading because as of June 9, 2004, Content 11 Match was producing undesirable and irrelevant results, angering customers, and producing revenue 12 that should not have been recognized because many clicks were non-billable. Yahoo! rushed 13 Content Match to market with a poor quality, manual mapping process. As set forth in more detail 14 in ¶95(c) above, CW11 confirmed Yahoo! routinely received customer complaints regarding bad 15 matching, which led to irrelevant clicks and even click tsunamis. CW8 was aware customers paid 16 Yahoo! for each of these clicks even though it was not the quality of advertising customers expected 17 or deserved from Yahoo!’s Content Match program, as is set forth in ¶95(c). As described in

18 ¶¶95(d)-(f), CW3 and CW 10 explained how Yahoo! permitted low quality Content Match partners to 19 display Yahoo! customer ads on irrelevant sites, resulting in customers being billed for clicks that

20 were not part of the relevant paid search experience that Yahoo! was to provide via Content Match. 21 This led to Yahoo!’s recognition of revenue that should not have been received because these clicks 22 were non-billable. CW6, CW8, and CW17 corroborated the horrible matching quality of Content 23 Match, as is set forth in ¶¶95(e)-(f) above, that produced undesirable results, angered customers, and 24 led to Yahoo!’s recognition of what should have been non-billable revenue. CW8 confirmed the 25 Individual Defendants were aware of the problems associated with Content Match – and Domain 26 Match – through regular reports received from managers, as is set forth in ¶95(d).

27 (b) Contrary to defendants’ statements on July 7 and 8, 2004, that 28 Overture/Yahoo!’s advertising segment, a “core business,” was performing “very well” (¶¶103,

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1 106), Overture’s search technology was actually severely overloaded and not operating properly, and 2 paid advertising, particularly Content Match, was utilizing poor matching technology and low

3 quality partners that led to ad placement on irrelevant websites, resulting in Yahoo!’s recognition of 4 revenue from clicks that should have been non-billable, and increased customer dissatisfaction and 5 complaints. The false and misleading nature of defendants’ statements are confirmed by CW3, 6 CW6, CW8, CW10, CW11, CW12, CW15, and CW17, as is set forth in detail in ¶¶95(a)-(f) above.

7 (c) As detailed in ¶¶259-274, during 2Q 04, Yahoo! improperly recognized 8 21.5% of its paid search revenue – which constituted approximately 33% of the total Marketing 9 Services Revenue in 2Q 04 – attributable to click and distribution fraud or $49,020,000 because this

10 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

11 (d) As detailed in ¶¶280-282, during 2Q 04, Yahoo! failed to properly record a

12 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies;

13 (e) As detailed in ¶¶283-291, during 2Q 04, Yahoo! failed to disclose, as required 14 by the SEC Regulation S-K, known trends and uncertainties by not reporting the practice of 15 improperly recognizing revenue generated by click and distribution fraud and thereby not disclosing 16 Yahoo!’s actual financial performance;

17 (f) As detailed in ¶¶292-295, during 2Q 04, Yahoo!’s publicly issued financial 18 statements violated fundamental accounting principles requiring that such statements contain 19 complete and reliable information, presented in a conservative manner regarding how managers

20 discharged their stewardship responsibilities of the Company and the actual financial performance of 21 the Company; 22 (g) As detailed in ¶¶259-274, during the 2Q 04, as a consequence of the

23 aforementioned practices, the Company’s revenues and net income were artificially inflated and 24 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by

25 $49,020,000 and net income was overstated by $0.03/per share. 26 109. As a result of the Individual Defendants’ campaign to push Yahoo!’s stock higher by 27 disseminating false and misleading information to analysts who they knew would pass it along to the 28 market and investors, Yahoo! stock continued to recover, moving up from $30.49 on September 9,

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1 2004 to $33.94 on September 16, 2004. By early October 2004, Yahoo! had climbed to over $35 per 2 share, had recovered back to its high reached before its disappointing 2Q 04 report was issued in 3 early July 2004 and continued to trade at artificially inflated prices. 4 110. With knowledge of the true facts set forth in ¶¶108(a)-(b), defendant Semel sold 5 3,000,000 shares of his Yahoo! stock at an average artificially inflated price of $30.28 per share 6 between July 13 and July 27, 2004, reaping total proceeds of $90,746,500.

7 On October 12, 2004, Defendants Issued False and Misleading Statements About Yahoo! ’s 3Q 04 Financial Results 8 111. On October 12, 2004, Yahoo! reported its 3Q 04 results via a news release stating: 9 Yahoo! Reports Third Quarter 2004 Financial Results 10 Company Posts Revenues of $907 Million, Operating Income of $172 11 Million, Operating Income Before Depreciation and Amortization of $260 Million

12 Yahoo! Inc. (Nasdaq: YHOO) today reported results for the third quarter ended September 30, 2004. 13 “Yahoo! began to demonstrate the next stage in the Company’s evolution in 14 the third quarter, and in doing so recorded its sixth consecutive quarter of record revenue,” said Terry Semel, chairman and chief executive officer, Yahoo!. “We 15 accelerated the pace at which new products and services were developed, which in- turn helped increase the level of user engagement across the Yahoo! network. Our 16 engaged audience enables us to deliver an unmatched set of advertising opportunities, providing deeper value to our marketers, and supporting the mantra 17 that great products are the key to a great business.”

18 a Revenues were $907 million for the third quarter of 2004, a 154 percent increase compared to $357 million for the same period of 2003. 19 • Marketing services revenue for the third quarter of 2004 totaled $765 million, 20 a 212 percent increase from the $245 million reported in the same period in 21 2003. 22 a Revenues excluding traffic acquisition costs (“TAC”) were $655 million for the third quarter of 2004, an 84% increase compared to the $357 million for 23 the same period of 2003.

24 a Gross profit for the third quarter of 2004 was $574 million, an 86% increase 25 compared to $310 million for the same period of 2003. 26 a Net income for the third quarter of 2004 was $253 million or $0.17 per diluted share (including a net impact of $129 million, or $0.09 per share, 27 related to the sale of an investment and the associated tax benefit resulting from fully reserved capital losses becoming realizable). Excluding this gain, 28

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1 net income for the third quarter was $124 million, or $0.09 per diluted share. This compares with net income of $65 million or $0.05 per diluted share for 2 the same period of 2003.

3 112. Following the October 12, 2004 release, Yahoo! held a conference call for analysts 4 and the financial media, in which Semel, Rosensweig and Decker participated. During the call, the 5 following discussion occurred: 6 Terry Semel – Yahoo, Inc. – Chairman & CEO 7 . . . Yahoo has continued its run of exceptional growth with this being the sixth straight quarter of record revenues. Our ... continued investment in people and 8 infrastructure have led to the increased product quality and powerful rate of innovation which are really both paying off. The list of accomplishments during the 9 past quarter and this year . . . is substantial. 10 * * *

11 In our lead generation business we just celebrated the one year anniversary of the official union between Yahoo and Overture.... I’m happy to report we successfully 12 integrated Overture services into Yahoo’s network and in many cases exceeded the goals we set for ourselves. 13 14 In response to a question regarding paid search: “[T]hrough Content Match and rolling that out 15 across the Yahoo platform was the Yahoo network able to generate more leads or grow faster in 16 terms of the lead contribution through Overture than the affiliate base?,” Decker responded that: [I]n terms of the content Match roll-out, we are really pleased with what we’ve been 17 able to achieve by vertically adding the Content Match, not only to our own sites but to some large external customers.... [W]e’re really pleased with how we did on the 18 Yahoo network . . . in terms of . . . Content Match and of course Terry talked a little bit about Local Match, so we’re really feeling good about all of the implementations 19 that we have been able to achieve on Yahoo’s network from Overture. 20 113. Following the release of Yahoo!’s “record” 3Q 04 results which “beat” estimates and

21 the very favorable information defendants disseminated about the state of Yahoo!’s business, its 22 business model and its marketing services segment, Yahoo!’s stock advanced from $33.60 during the 23 day on October 12, 2004 to $36.28 on October 13, 2004 and continued to trade at artificially inflated 24 prices between $35 and $36 for the next several days. Analysts were impressed with the favorable 25 results and information and issued reports regaling it – further distributing it into the market and to 26 investors. 27 28

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1 114. Yahoo!’s 3Q 04 results were later filed with the SEC in Yahoo!’s 3Q 04 Form 10-Q, 2 signed by Decker. This Form 10-Q contained Yahoo!’s false 3Q 04 financial results, including those

3 previously reported on July 7, 2004. The 3Q 04 Form 10-Q also contained false Sarbanes-Oxley 4 certificates and statements about Yahoo!’s internal controls signed by defendants Semel and Decker

5 (see ¶¶292-295). 6 115. Defendants’ statements regarding Yahoo!’s 3Q 04 financial results contained in 7 ¶¶111-112 and 114 were materially false and misleading when made. The true facts which were 8 known to or recklessly disregarded by defendants were as follows:

9 (a) Contrary to defendants’ statements on October 12, 2004, the paid advertising 10 opportunities available to Yahoo! advertising customers during 3Q 04 did not provide “deep[ening]

11 value” (¶111), and Yahoo! was not providing customers with “great products” ( id.), because poor, 12 manual mapping technology and irrelevant advertisement placement was leading to customers being 13 billed for clicks that should have been non-billable and the obvious result of increased customer 14 complaints and dissatisfaction with the advertising opportunities, such as Content Match, that were 15 being touted as successful by Yahoo! during 3Q 04. According to CW10, CW11, CW12, and 16 CW 15, as of October 2004, Overture’s search platform was still severely overloaded and incapable 17 of handling the amount of internet traffic Yahoo! experienced, yet Yahoo!’s corporate headquarters 18 refused to provide the additional necessary resources to handle the increased traffic and also 19 terminated the Overture engineers most knowledgeable about the search platform and thus most

20 capable of upgrading it, as is detailed in ¶¶95(a)-(b) above. It was false and misleading for 21 defendants to state on October 12, 2004, that Yahoo!’s “continued investment in people and 22 infrastructure have led to increased product quality” (¶112), and that Yahoo! had “successfully

23 integrated Overture services into the Yahoo! network ( id.), when the Company refused to provide 24 the resources necessary to successfully integrate the Overture platform, despite repeated requests 25 from Overture personnel, which led to poor product quality in Content Match and the increasing 26 dissatisfaction of advertising customers, as is detailed in ¶95. The poor quality of Content Match, 27 which led to irrelevant ad placement and undesirable results for advertisers, makes defendant 28 Decker’s statement that Yahoo! was “really pleased” with the “Content Match roll-out” (¶112) false

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1 and misleading, particularly given Decker’s message to the market that she was knowledgeable 2 about this significant paid search product by speaking about its status. Defendants further misled the 3 market when they stated they had successfully “achieve[d]” the “implementations . . . on Yahoo!

4 network from Overture,” including Content Match (id.). In fact, Content Match produced poor and 5 unreliable results, leading to irrelevant placement of customer ads and angry advertisers, and more 6 importantly Yahoo!’s recognition of revenue from clicks that should have been non-billable, as was 7 corroborated by CW3, CW6, CW8, CW10, CW11, and CW17, set forth in detail in ¶¶95(c)-(f) 8 above. According to CW12, in late 2004, senior Yahoo! executives working under the Individual 9 Defendants, including Phu Hoang, came from the corporate headquarters to the Legacy Overture 10 facility in Pasadena, and alienated the Overture engineers and technical heads. At this time, 11 therefore, the Individual Defendants had insight into all the problems resulting from the overloaded 12 Overture platform through these senior executives.

13 (b) Furthermore, defendants’ statement that the vast opportunities available to 14 Yahoo! advertisers provided them with “deeper value” (¶¶111) as of October 2004 was false and

15 misleading because according to CW3, in late 2004 Yahoo! decided to relax the business rules in 16 place for filtering out the clicks resulting from click fraud, particularly within Content Match,

17 resulting in customers being even more overcharged than they previously were due to the irrelevant 18 placement of ads based on the bad mapping and poor quality partners within Content Match. The 19 relaxation of the click fraud filters allowed Yahoo! to generate extra revenue by allowing for the

20 counting of additional clicks that should have been non-billable, including those incurred on Content 21 Match partner sites. According to CW3, these changes to the business rules were simple 22 modifications to the coded instructions that determined how many clicks were deemed non-billable 23 because they were characterized as excessive within a given time period (typically in 15 minute 24 and/or one hour intervals). CW12 confirmed that throughout the Class Period, Yahoo! refused to 25 terminate relationships with affiliates known to be of poor quality because customers consistently 26 complained about the click traffic on such partner sites. According to CW8, such problematic issues 27 with Content Match – as well as Domain Match – were presented to the Individual Defendants in 28 regular reports from managers, as is set forth in ¶95(d).

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1 (c) As detailed in ¶¶259-274, during 3Q 04, Yahoo! improperly recognized 2 21.5% of its paid search revenue – which constituted approximately 33% of the total Marketing 3 Services Revenue in 3Q 04 – attributable to click and distribution fraud or $54,180,000 because this

4 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

5 (d) As detailed in ¶¶280-282, during 3Q 04, Yahoo! failed to properly record a

6 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies;

7 (e) As detailed in ¶¶283-291, during 3Q 04, Yahoo! failed to disclose as required 8 by the SEC Regulation S-K known trends and uncertainties by not reporting the practice of 9 improperly recognizing revenue generated by click and distribution fraud and thereby not disclosing 10 Yahoo!’s actual financial performance; 11 (f) As detailed in ¶¶292-295, during 3Q 04, Yahoo!’s publicly issued financial

12 statements violated fundamental accounting principles requiring that such statements contain 13 complete and reliable information, presented in a conservative manner regarding how managers 14 discharged their stewardship responsibilities of the Company and the actual financial performance of 15 the Company;

16 (g) As detailed in ¶¶259-274, during the 3Q 04, as a consequence of the 17 aforementioned practices, the Company’s revenues and net income were artificially inflated and 18 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by 19 $54,180,000 and net income was overstated by $0.04/per share.

20 116. Yahoo!’s stock jumped from a low of $36.00 on November 1, 2004 to as high as 21 $39.25 on November 3, 2004, on much higher than normal volume in reaction to the favorable 22 information the defendants disseminated to the market at the November 1, 2004 conference. 23 117. With knowledge of the true facts set forth in ¶¶1 15(a)-(b), defendant Semel sold 24 3,000,000 shares of Yahoo! stock between October 19 and 22, 2004, and defendant Nazem sold 25 700,000 shares of Yahoo! stock between October 15, 2004 and November 2, 2004, all at an average 26 artificially inflated price of approximately $35 per share for total proceeds of $131,499,650. 27 28

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1 Between January 2005 and March 2005, Defendants Issued False and Misleading Statements About Yahoo! ’s 4Q 04 Financial Results, Its Search Marketing Business and 2 Content Match 3 118. On January 18, 2005, Yahoo! reported its 4Q 04 and full year 2004 financial results 4 via a news release stating: 5 Company Posts Full Year Revenue of $3,575 Million, Operating Income of $689 Million, Operating Income Before Depreciation and Amortization of $1,032 6 Million 7 Yahoo! Inc. (Nasdaq: YHOO) today reported results for the fourth quarter and full year ended December 31, 2004. 8 “Yahoo! moved at an impressive pace in the fourth quarter, capping another 9 record year for the Company. Our users were more engaged in 2004 than ever before because of Yahoo!’s relentless focus on delivering the most innovative products and 10 services on the Internet,” said Terry Semel, chairman and chief executive officer, Yahoo!. “Yahoo! also benefited from the growing acceptance of online advertising 11 with marketers who recognize its effectiveness and are therefore increasingly using this platform to reach their consumers.” 12 • Revenues were $1,078 million for the fourth quarter of 2004, a 62 percent 13 increase compared to $664 million for the same period of 2003.

14 • Marketing services revenue for the forth quarter of 2004 totaled $911 million, 15 a 67% increase from the $545 million reported for the same period of 2003.

16 • Revenues excluding traffic acquisition costs (“TAC”) were $785 million for the fourth quarter of 2004, a 54 percent increase compared to $511 million 17 for the same period of 2003.

18 • Gross profit for the fourth quarter of 2004 was $691 million, a 56 percent increase compared to $443 million for the same period of 2003. 19 20 • Net income for the fourth quarter of 2004 was $373 million or $0.25 per diluted share (including a net impact of $185 million, or $0.13 per diluted 21 share, related to the sale of an investment). Excluding this gain, net income for the fourth quarter was $187 million, or $0.13 per diluted share. This 22 compares with net income of $75 million or $0.05 per diluted share for the same period of 2003. 23 24 • The press release also stated: “Yahoo!’s strong fourth quarter performance completes our third consecutive year of delivering strong organic revenue 25 growth, expanding operating margins . . .” said Susan Decker, chief financial officer, Yahoo!. 26 • Revenues for the year ended December 31, 2004 were $3,575 million, a 120 27 percent increase compared to $1,625 million for 2003. 28

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1 • Marketing services revenue for the year ended December 31, 2004 totaled $3,002 million, a 150% increase from the $1,200 million reported for 2003. 2 • Revenues excluding TAC for 2004 were $2,600 million, a 77 percent 3 increase compared to $1,473 million for 2003. 4 • Gross profit for 2004 was $2,276 million, an 80 percent increase compared to 5 $1,267 million for 2003.

6 • Operating income for 2004 was $689 million, a 133 percent increase compared to $296 million for 2003. 7 • 8 Net income for 2004 was $840 million or $0.58 per diluted share (including a net impact of $314 million, or $.022 per diluted share, related to the sale of 9 an investment and the associated tax benefit resulting from fully reserved capital losses become realizable). Excluding this gain, net income for 2004 10 was $526 million, or $0.36 per diluted share. This compares with net income of $238 million or $0.18 per diluted share for 2003. 11 119. The same day, January 18, 2005, Yahoo! held a conference call, conducted by Semel, 12 13 Decker and Rosensweig, for members of the analyst and financial media communities to discuss 4Q 14 04 and year-end 2004 financial results. The call repeated and addressed information previously 15 made public in the defendants’ press release. The following exchanges occurred during the 16 conference call: Terry Semel – Yahoo, Inc. – Chairman, CEO 17 ... Yahoo! has delivered a terrific fourth quarter to cap off a remarkable year. 18 We validated our strategy by further extending Yahoo!’s leadership position as the most comprehensive and valuable internet service for consumers and the most 19 diversified and largest global on-line advertising platform. 20 * * *

21 With the largest and most engaged audience and the most comprehensive and advanced advertising platforms, Yahoo! is the best-positioned internet Company to 22 take advantage of this shift. 23 * * *

24 In our sponsored search business, we achieved record revenue growth. Our team made it easier than ever for advertisers to participate by allowing them to focus more 25 on their marketing objectives and less on key words and bidding. 26 * * *

27 Yahoo! is once again well positioned to grow market share in a rapidly growing segment. Yahoo! has obviously had a phenomenal year .... I’m very, very excited 28 about our future.

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1 Responding to an inquiry as to whether Yahoo! was “developing technology tools for advertisers so 2 they can better buy different day parts and understand conversion rates so they can be priced more 3 efficiently,” Rosensweig stated:

4 Overture rolled out a series of tools and advancements this year, giving, as Terry pointed out in his presentation, the opportunity to focus more on where they 5 wanted to buy, what the most efficient way to buy was, how to buy across a series of performance key words as well as new products and services and Content 6 Matching and other areas, so you have a lot of tools available, they’re going to create more tools that will allow us to create the most efficient marketplace, which is 7 really what the goal is. So that’s what we’re doing in the Overture area. 8 120. Following Yahoo!’s reported 4Q 04 results and the upbeat conference call, securities 9 analysts following the Company, including analysts from Jefferies, Pacific Crest, Credit Suisse First 10 Boston, Bear Sterns, Legg Mason, S.G. Cowen & Co. and Citigroup issued reports on Yahoo! 11 repeating the positive information and further disseminating the information to investors and the 12 markets. These analysts noted Yahoo! beat consensus revenue and EPS estimates and established 13 better-than-expected FY 05 guidance. In addition, analysts continued to be impressed by Yahoo!’s 14 results, noting most of the upside to revenue growth came from Marketing Services.

15 • On January 19, 2005, analyst Youssef H. Squali of Jefferies issued a report entitled, “Upgrading to Buy on Bullish Guidance.” The article stated: “While 16 management does not release a break-down of marketing services revenues, 17 they commented that search revenues were strong, driven primarily by growth in volume . . . .” 18 121. On March 11, 2005, Yahoo! filed with the SEC its 2004 Form 10-K, which included 19 Yahoo!’s 2004 financial results, including its quarterly 2004 results as previously announced and 20 reported. The 2004 Form 10-K also contained false Sarbanes-Oxley certificates and statements 21 about Yahoo!’s internal controls signed by defendants Semel and Decker (see ¶¶292-295). Yahoo!’s 22 2004 Form 10-K also stated in pertinent part: 23 [W]e offer a series of sponsored search offerings that enable advertisers to display 24 text based links to their websites on the Yahoo! Network as well as on our affiliates’ websites. These advertisements are displayed in response to different user actions – 25 a keyword in a search query initiated by a user or when specific content is being viewed on the Yahoo! Network or the networks of our affiliates by a user. For 26 example, if a user searches on the keyword “television” in the Yahoo! Search box or the search box on the website of one of our affiliates, links to websites for advertisers 27 selling televisions will appear alongside the algorithmic search results. Alternatively, if the user is reading an article about interest rates, he or she may be presented with 28 advertising links to websites for mortgage-related advertisers. For these advertising

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1 services, we earn revenue when “click-throughs” occur, where “click-throughs” are defined as the number of times a user clicks on an advertiser’s listing. 2 * * * 3 Revenue Recognition. The Company’s revenues are derived principally 4 from services, which comprise marketing services for businesses and offerings to users. The Company classifies these revenues as marketing services and fees. 5 * * * 6 The Company generates revenue from the display of text based links to the 7 websites of its advertisers which are placed on the Yahoo! Network as well as on the websites of third party entities (which the Company refers to as “affiliates”) who 8 have integrated the Company’s sponsored search offerings into their websites. The Company recognizes revenue from these arrangements as “click-throughs” occur. 9 “Click-throughs” are defined as the number of times a user clicks on an advertiser’s listing. The Company pays affiliates based on click-throughs on the advertiser’s 10 listings that are displayed on the websites of these affiliates. These payments are called traffic acquisition costs. 11 122. Defendants’ statements regarding Yahoo!’s 4Q 04 and FY 04 financial results 12 contained in ¶¶118-121 were materially false and misleading when made. The true facts which were 13 known to or recklessly disregarded by defendants were as follows: 14 (a) Contrary to defendants’ statements on January 18, 2005, that Yahoo! provided 15 the “most . . . valuable internet service for consumers and the . . . largest global on-line advertising 16 platform” (¶119) and the “most comprehensive and advanced advertising platforms” (id.), 17 throughout 2004 Yahoo!’s paid search technology, acquired via Overture, was not operating 18 properly and was disliked by advertising customers because it led to undesirable results, and in fact 19 Yahoo! was attempting to catch up to the successful advertising opportunities offered by Google 20 rather than holding the top rank in that area. CW12 confirmed that Yahoo!’s attempt throughout 21 2004 to improve the paid search technology that had sustained Overture’s growth prior to the 22 massive influx of Yahoo! internet traffic failed. Once Yahoo! acquired Overture and took this 23 project out of the hands of the Overture engineers that were familiar with and most capable of 24 completing the project, progress towards completion halted, and not until late 2004 was any attempt 25 to improve the paid search technology reinitiated. Yahoo!’s termination of legacy Overture 26 engineers had a negative and severe impact on the project, according to CW12, because the new 27 Yahoo! engineers underestimated the scope and complexity of the project and did not have the same 28

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1 level of experience with the technology driving paid search as the Overture engineers. As is set forth 2 in detail in ¶¶95(a)-(b) above, CW10, CW11, CW12, and CW15 also confirmed that Yahoo!’s paid

3 search technology was inadequate and problematic throughout 2004, and that the Company’s 4 corporate headquarters refused to provide the necessary resources to improve the search platform to 5 the level where it could handle the Yahoo! traffic, thus eliminating the possibility that Yahoo!’s paid 6 search technology could be competitive with Google in 2004. CW8 confirmed that during 2005, 7 Yahoo! did not have the best search technology and did not offer the best search capabilities to 8 advertising customers in the industry. To the contrary, Google was clearly superior in these areas, 9 Yahoo!’s customer base was largely dissatisfied with Content Match, and there were increasing 10 complaints regarding bad traffic and low quality partners.

11 (b) Defendants’ statement on January 18, 2005, that Overture had introduced 12 multiple paid search tools during 2004 that gave advertisers “the opportunity to focus more on where 13 they wanted to buy [and] what the most efficient way to buy was,” including Content Match (¶119), 14 was false and misleading because advertisers lacked control over where their advertisements 15 appeared through Content and Domain Match, resulting in irrelevant placement and inefficient clicks 16 that should have been non-billable. CW6, CW8, CW10, CW11, and CW17 confirmed poor 17 matching technology and low quality partners throughout 2004, about which the Individual 18 Defendants were aware via regular reports they received, and led to the consistent irrelevant 19 placement of customer advertisements resulting in charges for non-billable clicks particularly within

20 Content Match, as is detailed in ¶¶95(e)-(f) above. Furthermore, CW9 stated that during his/her 21 tenure at Yahoo!, which included 2004, Content Match as well as Domain Match were problematic 22 for advertisers, creating inefficiencies in terms of irrelevant placement and excess charges for 23 customers. Both Content and Domain Match, according to CW9, resulted in poor quality traffic due 24 to low quality partners, which Yahoo! was unwilling to block because that would decrease the per- 25 click revenue it shared with these affiliates. As is set forth in ¶95(d), the Individual Defendants were 26 updated on these issues by managers overseeing the everyday issues associated with these two paid 27 search products. CW9 confirmed that customers were not even permitted to “opt-out” of Domain 28 Match, and thus had no choice regarding control or over whether their ads were placed on irrelevant,

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1 low quality partner sites – yet still had to pay Yahoo! each time a user clicked on these ads. This 2 arrangement eliminated a tremendous amount of efficiency for advertisers within Domain Match. 3 CW10 confirmed Yahoo! would not allow customers to opt out of international partner traffic, 4 known to be of lower quality, until at least January 2005. According to CW10, following the 5 Overture acquisition, Yahoo! refused to end its relationship with one particular affiliate that 6 generated poor traffic, called Gator, even though Yahoo! regularly received customer complaints 7 about the poor traffic it produced. CW12 confirmed Yahoo! refused to cease relationships with 8 known low quality affiliates throughout the Class Period. Also, as of October 2004, according to 9 CW13, Yahoo! had relaxed its business rules for eliminating non-billable clicks, hindering 10 customers’ ability to choose where their paid ads were placed and prohibiting customers from 11 efficiently advertising within Content and Domain Match, as is described in ¶115(b) above.

12 (c) Defendants’ statements contained in Yahoo!’s 2004 year-end financials, 13 which were released in late March 2005, regarding the function of Content and Domain Match were 14 false and misleading because customers were actually paying for clicks on their advertisements that 15 were not relevant to a “search keyword” typed by a user (within Domain Match), or were not 16 relevant to the “specific content . . . being viewed” by a user (within Content Match) (¶121). The

17 “click-throughs” defined by Yahoo! as resulting in revenue ( id.) were often invalid, whether due to 18 Yahoo!’s poor matching technology or other methods of click fraud known to Yahoo!, and thus 19 should have been non-billable to the advertising customer and excluded from Yahoo!’s revenue.

20 The poor quality of Content and Domain Match, as a result of inadequate technology and low quality 21 partners, which resulted in Yahoo!’s recognition of revenue from non-billable clicks, about which

22 the Individual Defendants were aware, is detailed above in this paragraph, as well as in ¶¶95(c)-(f).

23 (d) As detailed in ¶¶259-274, during 4Q 04, Yahoo! improperly recognized 24 21.5% of its paid search revenue – which constituted approximately 33% of the total Marketing 25 Services Revenue in 4Q 04 – attributable to click and distribution fraud or $73,530,000 because this

26 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

27 (e) As detailed in ¶¶280-282, during 4Q 04, Yahoo! failed to properly record a

28 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies;

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1 (f) As detailed in ¶¶283-291, during 4Q 04, Yahoo! failed to disclose, as required 2 by the SEC Regulation S-K, known trends and uncertainties by not reporting the practice of 3 improperly recognizing revenue generated by click and distribution fraud and thereby not disclosing 4 Yahoo!’s actual financial performance;

5 (g) As detailed in ¶¶292-295, during 4Q 04, Yahoo!’s publicly issued financial 6 statements violated fundamental accounting principles requiring that such statements contain 7 complete and reliable information, presented in a conservative manner regarding how managers 8 discharged their stewardship responsibilities of the Company and the actual financial performance of 9 the Company; 10 (h) As detailed in ¶¶259-274, during the 4Q 04, as a consequence of the 11 aforementioned practices, the Company’s revenues and net income were artificially inflated and 12 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by

13 $73,530,000 and net income was overstated by $0.05/per share. 14 123. Defendants’ statements on and about January 18 and 19, 2005 and March 2005, 15 which were false and misleading when made, had a direct effect on Yahoo!’s stock price which 16 continued to trade at artificially inflated levels.

17 In April 2005, Defendants Issued False and Misleading Statements About Yahoo!’s 1Q 05 Financial Results, Its Search Marketing Business and Content Match 18 124. On April 6, 2005, The Wall Street Journal published an article titled, “Traffic Jam: In 19 ‘Click Fraud,’ Web Outfits Have A Costly Problem – Marketers Worry About Bills Inflated by 20 People Gaming The Search-Ad System – Mr. McKelvey Turns Detective.” The article stated: 21 “[C]lick fraud” [is] a term the industry uses to describe someone clicking on a search 22 ad with ill intent. A fraudulent clicker can exploit the way Web ads work to rack up fees for a business rival, boost the placement of his own ads or make money for 23 himself. Some people even employ software that automatically clicks on ads multiple times. 24 . . . Some believe about 20% of clicks are from people not necessarily 25 interested in the product advertised, and therefore in the industry’s view, fraudulent; others say the problem is less severe. What is clear is that if left unchecked, click 26 fraud could damage the credibility of Google, Yahoo and the search-ad industry that spurred their meteoric growth. 27 * * * 28

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1 Yahoo says it uses a complex system of filters and analysis to weed out fraudulent clicks. 2 “Anyone who says this is not a real challenge is kidding you, ” said John 3 Slade, a senior director for product management at Yahoo’s search-ad arm. 4 * * *

5 Google and Yahoo won’t give a public estimate of the number of bad clicks. 6 125. On April 19, 2005,, Yahoo! issued a news release over Business Wire in which it 7 reported Yahoo!’s financial results for 1Q 05. The release stated in pertinent part as follows: 8 Consolidated Financial Results

9 • Revenues were $1,174 million for the first quarter of 2005, a 55 percent increase compared to $758 million for the same period of 2004. 10 • Marketing services revenue was $1,025 million for the first quarter of 2005, a 11 54 percent increase compared to $665 million for the same period of 2004. 12 • Revenues excluding traffic acquisition costs (“TAC”) were $821 million for 13 the first quarter of 2005, a 49 percent increase compared to $550 million for the same period of 2004. 14 • Gross profit for the first quarter of 2005 was $720 million, a 51 percent 15 increase compared to $476 million for the same period of 2004. 16 • Net income for the first quarter of 2005 was $205 million or $0.14 per diluted 17 share (including net income of $15 million, or $0.01 per diluted share, related to the sale of certain investments and settlements). This compares with net 18 income of $101 million or $0.07 per diluted share for the same period of 2004. 19 126. Later that day, on April 19, 2005, Yahoo! hosted a conference call with analysts and 20 21 investors to discuss Yahoo!’s 1Q 05 results, current business operations and future prospects. 22 Defendants Semel, Decker and Rosensweig had an opportunity to address analysts’ and investors’ 23 questions and concerns. During the call, defendant Semel commented on Yahoo!’s advertising 24 business and search technology: Building the best quality services to attract the world’s largest and most engaged 25 online audience has enabled Yahoo! to create what we believe is the best advertising environment on the Internet today. Our marketing services business delivered just 26 over $1 billion in revenue in the quarter. 27 * * * 28

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1 Sponsored search is . . . equally exciting and [a] huge opportunity for us. Yesterday we officially re-branded Overture to be called Yahoo! Search Marketing 2 and we’ll bring together our Sponsored Search and other self-service offerings to make it even easier for marketers to take advantage of all of our services. . . . 3 . . . For example, we have improved our matching capabilities which create 4 more opportunities for marketers to get their messages in front of consumers, at the moment they are interested, increasing coverage of ads and providing more ways for 5 advertisers to get high quality clicks. 6 127. On that same day, defendants Rosensweig and Decker addressed the issue of click 7 fraud raised by analyst Mark Maheney: 8 Great, thank you very much. Could you address the issue of click fraud, to what extent the incident has been increasing, [and] to what extent it’s an increasing cost of 9 business in the Search industry? 10 Dan Rosensweig: This is Dan. And I think Sue and I will tackle that one together. In the category of click fraud or click Spam, clearly there’s been a lot of 11 press around it lately. In any emerging and dynamic marketplace, these kinds of obstacles and issues are inevitable. It’s happened through the first 10 years of the 12 Internet, whether it was Spam or privacy or commerce related issues and Yahoo! has always been a leader in learning about these things, identifying them, fighting 13 them. We use technology and human resources on this. Overture had already been a leader in really focusing on this and we’ve built numerous layers of defense 14 against it. It’s not a big issue at this point. We have been able to contain it. We take it very, very seriously. And so we’re going to continue to invest and make sure 15 that it’s a regular cost of business for us. So I don’t know, Sue? 16 Susan Decker: Mark, I don’t have a lot to add. I think Dan really covered it. It’s one of these things that Overture had addressed for many years and is very, very 17 capable and continues to prioritize heavily. We have a number of algorithms that fight this, that filter out the clicks, we see it almost immediately, so it’s very straight 18 forward to filter them out and we continue to improve our process, and the fight is getting better and better and we feel like it’s well under control. 19 128. Defendants’ statements which were false and misleading when made had a direct 20 effect on Yahoo!’s stock which increased to $34.65 on April 20, 2005 from $33.22 on April 19, 21 2005, and continued to trade at artificially inflated levels. 22 129. Yahoo!’s 1 Q 05 results were later filed with the SEC in Yahoo!’s 1 Q 05 10-Q Report, 23 signed by Decker. This 10-Q Report contained Yahoo!’s false 1Q 05 financial results, including 24 those previously publicly reported. The 10-Q also contained the false Sarbanes-Oxley certificates 25 and statements about Yahoo!’s internal controls signed by defendants Semel and Decker (see ¶¶292- 26 295). 27 28

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1 130. Defendants’ statements regarding Yahoo!’s 1Q 05 financial results contained in 2 ¶¶124-127 and 129 were materially false and misleading when made. The true facts which were

3 known to or recklessly disregarded by defendants were as follows:

4 (a) Contrary to defendants’ statement that Yahoo! had “improved [its] matching 5 capabilities which create more opportunities” for advertising customers (¶126), during 1Q 05

6 Yahoo!’s paid search products continued to rely on an inadequate search algorithm and produce bad 7 matching. Following Yahoo!’s acquisition of Overture and throughout the Class Period, including 8 1Q 05, the main cause of customer complaints was bad mapping technology, which resulted in 9 customer ads appearing in results for non-relevant search terms, particularly in the area of Content 10 Match. CW8 confirmed the Individual Defendants regularly received reports regarding the 11 performance of Content Match, as is set forth in ¶95(d). CW15 stated that in the summer of 2004, 12 Yahoo! decided to re-design the technical platform so it could utilize multiple algorithms for 13 relevancy and attempt to be competitive with Google. This project, however, experienced massive 14 delays from its inception and throughout the Class Period, and thus failed to improve Yahoo!’s 15 matching capabilities or expand opportunities for advertising customers during 1 Q 05 as defendants 16 stated. CW 17 confirmed that during 2005, the distribution of advertisements on Content Match – a 17 program which relied on Yahoo!’s “matching capabilities” – was problematic because

18 advertisements were being placed on websites that contained content irrelevant to the advertisement.

19 (b) Defendants’ statements on April 19, 2005, that Yahoo! was a leader in 20 “identifying” and “fighting” click fraud (¶127), was using “technology and human resources” to

21 combat it (id.), had “built numerous layers of defense against it” ( id.), and that click fraud was “not a

22 big issue” (id.), was “contain[ed],” and was “well under control” (id.), and Yahoo!’s statement to

23 The Wall Street Journal that it “uses a complex system of filters and analysis to weed out fraudulent 24 clicks” (¶124), were false and misleading because during 1 Q 05 Yahoo! was improperly recognizing

25 revenue from non-billable clicks and even manipulating the filters in place to maximize its revenue. 26 According to CW12, Google was dominating the market by 2005, and when Yahoo!’s revenues 27 suffered as a result, Yahoo! relied on improperly billed click revenue to meet forecasts. During this 28 time frame, CW6 had regular communication with large budget advertising customers, who

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1 consistently complained about click fraud. Rather than “fighting” click fraud, CW6 confirmed the 2 main focus at Yahoo! was to minimize customer refunds. According to CW12, click fraud was a 3 problematic issue at Yahoo! throughout the Class Period, and thus the Company did not have it 4 “contain[ed]” or “well under control” (¶127), and contrary to defendants’ statements on April 19,

5 2005, click fraud was in fact “a big issue” ( id.). Even the Yahoo! representative quoted in the April

6 6, 2005 Wall Street Journal article about click fraud (¶124) stated that “anyone who says this (click 7 fraud) is not a real challenge is kidding you.” Furthermore, rather than containing and controlling

8 improper charges resulting from click fraud, and prevent such charges from being passed to 9 customers, CW12 was aware by following up on investigations via the customer relationship 10 management (“CRM”) that Yahoo! delayed refunding any dollar amounts owed to customers until 11 after quarter end, so that the Company’s revenue would increase at the end of a quarter. The 12 dramatic increase in customer complaints about click fraud at the end of a quarter, as described by 13 CW 12, along with the corresponding variations in end-of-quarter “talk scripts” to respond to such

14 complaints, reflects Yahoo!’s practice of allowing more non-billable revenue to be recognized at the 15 end of a quarter. CW 12 confirmed that throughout the Class Period, including 1 Q 05, Yahoo! failed 16 to institute more sophisticated click detection standards and systems, despite regular customer 17 complaints about the consistent low quality of clicks. CW 12 stated Yahoo! refused to mitigate the 18 problem by continuing relationships with partners known to incur charges that should be non-billable 19 – which was also confirmed by CW10’s knowledge of Yahoo! continuing its relationship with

20 known low quality affiliate Gator at least through January 2005. Complaints about click fraud were 21 also received by advertising agencies acting as liaisons for customers, according to CW 12.

22 (c) According to CW9, defendant Decker regularly reviewed customer complaints 23 about click fraud. As defendant Decker admitted on April 19, 2005, Yahoo! can see “almost 24 immediately” (¶127) whether or not a click has been filtered out as non-billable to the advertising

25 customer. CW16, a Revenue Controller at Yahoo!’s corporate headquarters in Sunnyvale, was 26 aware through his/her substantial contact with defendant Decker that as CFO, Decker controlled the 27 ultimate financial aspects of whether Yahoo! recognized revenue that should have been non-billable 28 to the advertising customer. CW 16 confirmed that throughout the Class Period, defendant Decker

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1 had the final authority to set Yahoo!’s reserve for “bad revenue” resulting from any click traffic that

2 could require refunding customers, as this was the largest reserve for revenue derived from the paid 3 search business, which was the largest single revenue component of Yahoo! and produced half of its 4 revenue following the Overture acquisition. According to CW 16, however, Yahoo! failed to amend 5 the refund rate dictating the amount of this reserve following its acquisition of Overture, despite the 6 drastically increased incidence of non-billable click charges being passed on to advertising 7 customers following the influx of Yahoo! traffic into the Overture platform, which was known to 8 Individual Defendants to be unable to handle such an increase, as is set forth in ¶95. Furthermore, 9 CW16 is certain defendant Decker had to approve customer refunds in excess of a certain dollar 10 amount and thus was responsible for allowing charges for certain clicks that should have been non- 11 billable to be passed on to Yahoo!’s advertising customers. CW8 confirmed the Individual 12 Defendants were aware of click fraud and the bad traffic caused by partnering with low quality 13 affiliates. CW8 stated defendant Semel did not personally deal with any technical matters, but was 14 nonetheless regularly and accurately briefed by Jeff Weiner and defendants Nazem and Rosensweig. 15 During meetings CW8 attended with Yahoo! management from 2003 throughout the Class Period, 16 s/he heard managers in charge of click fraud issues consistently state that it was better to not know 17 the exact percentage of clicks that should be non-billable and the associated revenue that should have 18 been refunded, even though click fraud was a growing issue.

19 (d) As detailed in ¶¶259-274, during 1Q 05, Yahoo! improperly recognized 20 21.5% of its paid search revenue – which constituted approximately 35% of the total Marketing 21 Services Revenue in 1Q 05 – attributable to click and distribution fraud or $77,185,000 because this

22 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

23 (e) As detailed in ¶¶280-282, during 1Q 05, Yahoo! failed to properly record a

24 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies;

25 (f) As detailed in ¶¶283-291, during 1Q 05, Yahoo! failed to disclose, as required 26 by the SEC Regulation S-K, known trends and uncertainties by not reporting the practice of 27 improperly recognizing revenue generated by click and distribution fraud and thereby not disclosing 28 Yahoo!’s actual financial performance;

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1 (g) As detailed in ¶¶292-295, during 1Q 05, Yahoo!’s publicly issued financial

2 statements violated fundamental accounting principles requiring that such statements contain 3 complete and reliable information presented in a conservative manner regarding how managers 4 discharged their stewardship responsibilities of the Company and the actual financial performance of 5 the Company;

6 (h) As detailed in ¶¶259-274, during 1Q 05, as a consequence of the 7 aforementioned practices, the Company’s revenues and net income were artificially inflated and 8 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by 9 $77,185,000 and net income was overstated by $0.06/per share.

10 On July 19, 2005, Defendants Issued False and Misleading Statements About Yahoo!’s 2Q 05 Financial Results, the Release of Panama and Content Match 11 131. On July 19, 2005, Yahoo! issued a news release over the Business Wire in which it 12 reported Yahoo!’s financial results for 2Q 05 and defendant Semel talked about Yahoo!’s business 13 prospects. The release stated in pertinent part as follows: 14 “Yahoo! continued to see solid growth in the second quarter as a result of our 15 strength in both search marketing and brand advertising, increased engagement from our large, global audience, and our ability to execute and perform according to plan,” 16 said Terry Semel, chairman and chief executive officer, Yahoo!. “We have a healthy business model that we believe will enable us to take advantage of future growth 17 opportunities and we remain dedicated to providing our users with the very best services on the Internet.” 18 Consolidated Financial Results 19 • Revenues were $1,253 million for the second quarter of 2005, a 51 percent 20 increase compared to $832 million for the same period of 2004.

21 • Marketing services revenue was $1,094 million for the second quarter of 22 2005, a 51 percent increase compared to $723 million for the same period of 2004. 23 • Revenues excluding traffic acquisition costs (“TAC”) were $875 million for 24 the second quarter of 2005, a 44 percent increase compared to $609 million for the same period of 2004. 25 • Gross profit for the second quarter of 2005 was $767 million, a 43 percent 26 increase compared to $535 million for the same period of 2004. 27 • Net income for the second quarter of 2005 was $755 million or $0.51 per 28 diluted share (including net income of $563 million, or $0.38 per diluted

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1 share, related to the sale of an investment). This compares with net income of $113 million or $0.08 per diluted share for the same period of 2004. 2 132. Yahoo!’s 2Q 05 results were later filed with the SEC in Yahoo!’s 2Q 05 Form 10-Q, 3 4 signed by Decker. This Form 10-Q contained Yahoo!’s 2Q 05 financial results, including those 5 publicly reported on July 19, 2005 (¶88). The Form 10-Q also contained the false Sarbanes-Oxley 6 certificates and statements about Yahoo!’s internal controls signed by defendants Decker and Semel

7 (see ¶¶292-295). 133. On July 19, 2005, Yahoo! also hosted a conference call with analysts and investors 8 9 during which Semel and Rosensweig discussed Panama and Content Match. Decker also 10 participated in the conference call. Defendant Semel gave a detailed review of Yahoo!’s advertising 11 business and discussed Panama with analysts and investors. During the conference call, Semel 12 promised that important upgrades in Yahoo!’s advertising and self-publishing platforms (Panama) 13 would be introduced in 2005 with additional value from Yahoo!’s long-term initiatives (Panama) 14 being realized as 2006 progressed: We have a strong road map in place for improving technologies in order to 15 optimize relevance and matching capabilities in our core services globally. During the balance of this year, we will introduce important upgrades in areas such as 16 advertiser and publishing self-service platforms, which we expect will substantially improve our offerings in both content match and sponsored search. 17 We also plan to offer new contextual targeting capabilities which would 18 enhance our services both on Yahoo! and for small publishers throughout the Web. These initiatives are among the highest priorities within the Company and important 19 investment in Yahoo!’s long-term growth.

20 We expect to improve the relevancy and performance of our core business as well as create new opportunities for our marketing partners and for Yahoo!. 21 We anticipate that we will begin realizing additional value from these long-term initiatives as 2006 progresses. 22 Looking at our overall marketing services business, we are in a position of 23 real strength.

24 * * *

25 Heath Terry – Credit Suisse First Boston – Analyst 26 Thank you. I was hoping you could, without knowing you’re not going into specific numbers, just kind of characterize the difference that you’re seeing in the 27 growth between your branded business and your search business and kind of what your expectations for that relationship going forward’s going to be. 28

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1 * * * 2 Terry Semel – Yahoo, Inc. – Chairman, CEO

3 * * * 4 So if you just think about us one more time in our first year in the search or sponsored search business and search business, we dedicated that year to coming up 5 with what I think is the best algorithmic search product in the world. And as we began year two, as we began ‘05, we put together a very aggressive and very 6 achievable road map which included some of the best and greatest engineers we had here at Yahoo!, had worked on, many of whom had worked on the algorithmic 7 approach, and we went after the clear question of how do we increase our abilities to monetize our sponsored search better, and I believe we’re right on track and we’re 8 very excited about the developments and I think you just see a lot more of it in the latter part of this year. 9 134. During the July 19, 2005 conference call defendant Rosensweig discussed with 10 analysts and investors the success of Content Match, stating: 11 Jeetil Patel – Deutsche Bank Securities – Analyst 12 Great. Thank you. Two questions. Have you done any sort of different 13 implementation as it relates to contextually integrating some of the sponsored links? . . . Can you talk about how you’re seeing click-throughs or click-through rates trend 14 in that side of the equation? 15 * * * 16 Dan Rosensweig – Yahoo, Inc. – COO 17 This is Dan. I’ll take the first part of your question on the different implementations regarding content managed throughout the Yahoo! network. 18 We’re sort of very excited about the opportunity with content match. What 19 we try to do now is make sure that we create the right format of advertising, the greatest amount of relevancy within the environments and create the best experience 20 for both users and advertisers. 21 * * *

22 All of it is yielding very good results so the technology about improving the matching algorithms on contextual advertising are going up each and every day 23 and that’s been very helpful. The new implementations are working very well and so we’re seeing increased success with that and we expect to continue to roll that 24 out across the network. 25 135. Based on the July 19, 2005 conference call and follow-up conversations with 26 defendants, analysts following Yahoo! issued reports confirming that Yahoo!’s monetization efforts 27 (Panama) would begin seeing results in late 2005 and early 2006: 28

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1 • On July 20, 2005, Pacific Crest issued a Morning Note entitled, “Q2 Is Disappointing, but the Major Trends Are Intact,” stating: “ Management 2 indicated that it expects its initiatives to improve relevancy of its key-word 3 matching should be ready for 2006. We believe that there is a significant gap in monetization between Yahoo and Google, due at least in part to 4 relevancy, and these initiatives should provide Yahoo an additional growth driver in 2006.” 5 • On July 20, 2005, Citigroup Smith Barney stated: “ We view the ‘fixing’ of 6 YHOO’s search algorithm at year-end and strong December seasonality as the next major catalysts.” 7 8 • On July 20, 2005, Deutsche Bank stated: “We expect to see steady growth in paid search, as the company continues to invest in its web search technology 9 to optimize relevance, performance and create new revenue-generating opportunities. In particular, we are looking for upgrades to the sponsored 10 search program, improvements to the self-service platform . . . in the next few quarters.” 11 12 • On July 20, 2005, William Blair & Company issued a Research Note entitled, “Strong Organic Growth But No Upside Surprise,” stating: “During the call, 13 management expressed optimism about the health of the business including . . . improved search functionality in 2006, and the outlook for 14 online branded advertising and paid search. . . . Management stated that there is testing underway today and that improvements should be evident in 15 2006.” 16 • On September 28, 2005, RBC Capital Markets issued its report: “Assuming 17 YHOO is able to rank paid search ads on its network on a click -yield basis, similar to Google, Yahoo should experience an immediate monetization 18 uptick . . . . Yahoo management has recently confirmed its intention to make this change happen late this year or early in 2006.” 19

20 136. Although Yahoo!’s reported 2Q 05 results were in line with management’s guidance, 21 because those results fell shy of some analyst’s expectations, the stock traded down 10% in the after- 22 market to $33.82 from its closing price of $37.73. Despite this decline, defendants’ statements on 23 July 19, 2005, which were false and misleading when made, had a direct effect on Yahoo!’s stock 24 price which continued to trade at artificially inflated levels.

25 137. Defendants’ July 19, 2005 statements contained in ¶¶131-134 were materially false 26 and misleading when made. The true facts which were known to or recklessly disregarded by 27 defendants were as follows:

28

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1 (a) CW8 confirms that Semel’s July 19, 2005 statements in ¶133, that Yahoo! 2 would be introducing “important upgrades in areas such as advertising and publishing self-service 3 platforms” during 2005 and improving “the relevancy and performance” of its core business, and

4 that Yahoo! would “begin realizing additional value from these long-term initiatives as 2006 5 progresses,” were all statements relating to Panama. Panama involved a revamping of Overture’s

6 platform into an entirely new platform in order to increase monetization from its paid search 7 business and compete with Google. One component of Panama was to upgrade the user interface 8 (advertiser and publishing self service platforms) so that Yahoo! advertising customers could better 9 control their marketing campaigns, including managing search terms, bidding on search terms and

10 utilizing other marketing tools. The other component of Panama, and most important for revenue, 11 was the re-design of the sponsored search ranking system to account for click-through-rates so that 12 sponsored search results would be more relevant (relevancy) and generate more revenue (monetize) 13 for Yahoo!. According to CW8, Panama was Yahoo!’s only long-term initiative as of July 2005 and 14 continuing throughout the Class Period. CW 12 also confirms that any reference to “monetization”

15 by defendants is a reference to Panama. CW 12 corroborates that the primary purpose of Panama 16 was to increase revenue from searches, thus any reference to monetization during the Class Period is 17 a reference to Panama.

18 (b) Defendant Semel’s July 19, 2005 statements in ¶133 regarding the release of 19 Panama in 2005 and additional value being realized as 2006 progressed, were false and misleading

20 when made because the statements lacked any factual basis. By July 2005, Yahoo! was under 21 extreme pressure to revamp its advertising platform because it was losing market share to Google. 22 Yahoo! was relying on Panama to increase revenues (monetization) to compete with Google. 23 However, according to CW 1 and CW8, as of July 2005, virtually no work had been done on Panama. 24 From mid-2004 to mid-2005, Panama languished due to conflicts between Yahoo! and Overture 25 executives, unrealistic timelines and insufficient staffing. According to CW1 and CW8, by 26 July/August 2005 two attempts were made at starting Panama, but each attempt failed miserably 27 resulting in no progress on Panama’s development. The Overture system had been written as one 28 big chunk of code that took five years and 150 engineers to complete and Panama involved rewriting

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1 the entire Overture platform. Several steps had to be completed before Panama could be released, 2 none of which were planned as of July 2005. The steps included assembling the resources for the 3 project, including an engineering team and equipment and hardware, designing, writing and testing

4 an enormous amount of code, and migrating Yahoo!’s 500,000 existing advertising customers over 5 to the new Panama platform. According to CW8, in July 2005 defendants made a third attempt at 6 getting Panama up and running and an Operating Committee was formed to run the day-to-day 7 operations of the project. 8 (i) CW8 confirms that Panama encompassed massive code writing for 9 several new systems, including an entirely new user interface for advertisers to navigate, a reliable 10 billing and cash management system to handle millions of transactions, and a new ranking software 11 and new database to keep track of millions of clicks. According to CW8, as of July 19, 2005, no 12 code was actually written for Panama. CW1 confirms that code writing for Panama did not even 13 start until 2006. Ultimately, it took more than a year to design, write and test the code for Panama. 14 (ii) According to CW8 it was not until September 2005 that the Operating 15 Committee decided to re-write all of the systems in the Overture platform, from front to back-end. It 16 was not until October 2005 that Semel and Decker authorized defendant Nazem to put the needed 17 resources into the project. Shorly after the commitment of resources in October 2005, a Steering 18 Committee was formed to oversee the Operating Committee. Defendant Nazem was a member of 19 the Steering Committee along with Weiner and received weekly, sometimes daily, updates from the

20 Operating Committee on the status of Panama. The Operating Committee was comprised of leaders 21 of the various functional teams that worked directly on Panama which included engineering 22 management, architecture, applied engineering, serving engineering, offers engineering, advertiser

23 experience, and program management. According to CW8, Nazem and other members of the 24 Steering Committee reported directly to the Executive Sponsorship Committee, which included 25 Semel, Decker, and Rosensweig, on a weekly basis about the status of Panama and the reports the 26 Steering Committee received from the Operating Committee. 27 (iii) According to CW8, as of defendants’ July 2005 statements, there were 28 no plans in place for migration of more than one-half million Yahoo! customers. The migration

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1 phase was crucial because, according to CW8, the Company would not fully realize the economic 2 benefit from Panama until migration was complete. Because Panama was expected to maximize 3 results for Yahoo!’s advertising customers, according to CW8, out of fairness to its customers 4 Yahoo! decided not to activate Panama’s new bidding ranking system, which was the primary 5 monetization component of Panama, until all existing customers were switched over to the new 6 Panama platform. According to Steve Mitgang, a Yahoo! Senior Vice President and senior engineer 7 on Panama, the migration process was equivalent to “changing engines in airplane midair without 8 any of the passengers noticing.” The migration of customers required interaction and planning

9 between Yahoo! engineers and sales department, which worked directly with Yahoo!’s advertising 10 customers. According to CW8, although the sales department was an integral part of the migration 11 planning process, they were not consulted on the migration plan until August 2006. According to 12 Panama scheduling documents, once the sales department was involved, the schedule for migration 13 changed from two months to six months. 14 (iv) The fact that Panama encompassed a complete overhaul of an existing 15 system, with no human resources, migration plan or written code in place as of July 2005 made it 16 impossible for defendants to reasonably believe that any benefits from Panama would be realized in 17 2005 or as 2006 progressed. According to CW8, it took over 1,000 employees, including 300 18 engineers, to complete Panama, over a year to write the code and six months to complete the 19 migration. Because of the complexity of Panama and the lack of any planning, code or migration

20 plan, according to CW8, as of July 2005, it was impossible for any economic impact to be realized 21 from the Panama initiatives by 2005 or even as 2006 progressed. Rather, CW8 confirms that, as of 22 July 2005, the Yahoo! engineers who did have an understanding of the magnitude of Panama 23 informed defendants that a release was probably not feasible even during the first half of 2006 and 24 even then no economic benefit would be realized until migration was complete, which would have 25 been after 2006.

26 (c) Contrary to defendant Rosensweig’s statement contained in ¶134 that Content 27 Match was “yielding very good results” and “working very well” and that the Company was seeing

28 increased success with the product, during 2Q 05 Yahoo!’s paid search products continued to rely on

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1 an inadequate search algorithm and produced poor contextual matching. As explained in ¶¶95(a)- 2 (h), following Yahoo!’s acquisition of Overture and throughout the Class Period, including 2Q 05,

3 the main cause of customer complaints was bad mapping technology which resulted in customer ads 4 appearing in results of non-relevant search terms, particularly with Content Match. CW8 confirms 5 that Semel, Decker, Rosensweig and Nazem regularly received reports regarding the performance of 6 Content Match as set forth in ¶95(d). CW15 confirmed that in the summer of 2004 Yahoo! decided 7 to re-design the technical platform so it could utilize multiple algorithms for relevancy and attempt 8 to be competitive with Google. This project, however, experienced massive delays from its 9 inception and throughout the Class Period, and thus failed to improve Yahoo!’s matching 10 capabilities or render good results. CW 17 confirmed that during 2005, the distribution of ads on 11 Content Match – a program which relied on Yahoo!’s “matching capabilities” – was problematic

12 because ads were being placed on websites that contained content irrelevant to the advertisement.

13 (d) Yahoo’s reported 2Q 05 financial results reported on July 19, 2005 and 14 subsequently contained in its Form 10-Q filed with the SEC were false and misleading because the 15 2Q 05 financial results included improperly recognized revenue from click fraud as detailed ¶¶47-59.

16 (e) As detailed in ¶¶259-274, during 2Q 05, Yahoo! improperly recognized 17 21.5% of its paid search revenue – which constituted approximately 35% of the total Marketing 18 Services Revenue in 2Q 05 – attributable to click and distribution fraud or $82,345,000 because this

19 revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

20 (f) As detailed in ¶¶280-282, during 2Q 05, Yahoo! failed to properly record a

21 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies; 22 (g) As detailed in ¶¶283-291, during 2Q 05, Yahoo! failed to disclose, as required 23 by SEC Regulation S-K, known trends and uncertainties by not reporting the practice of improperly 24 recognizing revenue generated by click and distribution fraud and thereby not disclosing Yahoo!’s 25 actual financial performance;

26 (h) As detailed in ¶¶292-295, during 2Q 05, Yahoo!’s publicly issued financial 27 statements violated fundamental accounting principles requiring that such statements contain 28 complete and reliable information presented in a conservative manner regarding how managers

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1 discharged their stewardship responsibilities at the Company and the actual financial performance of 2 the Company. 3 (i) As detailed in ¶¶259-274, during 2Q 05, as a consequence of the 4 aforementioned practices, the Company’s revenues and net income were artificially inflated and 5 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by 6 $82,345,000 and net income was overstated by $0.06 per share. 7 138. With knowledge of the true facts set forth in ¶137, defendant Semel sold 942,886 8 shares of Yahoo! stock between July 26 and August 19, 2005 at an average artificially inflated price 9 of approximately $34 per share for total proceeds of $32,316,517 and defendant Rosensweig sold a 10 total of 152,000 shares of Yahoo! stock on August 1, 2005 and September 1, 2005 at an average 11 inflated price of approximately $33.37, for total proceeds of $5,073,560.

12 On August 3, 2005, Defendants Issued False and Misleading Statements About Yahoo!’s Publisher Network and Content Match 13 139. On August 3, 2005, Yahoo! issued a release, entitled “Yahoo! Launches Beta 14 Publisher Network for Small- and Medium-Sized Publishers; Self-Serve Platform Provides Access 15 to New Sources of Revenue and Yahoo! Content,” which stated in relevant part that: 16 The first advertising product Yahoo! will be offering through the beta is its 17 Content Match(TM) contextual listings. Content Match enables publishers to place Yahoo!’s contextually-relevant listings on their sites and receive a share of the 18 revenue generated by them. Already proven on Yahoo!’s large distribution sites, Content Match can help small- and medium-sized publishers monetize valuable site 19 inventory and provide additional qualified leads to Yahoo! advertisers.

20 140. Defendants’ August 3, 2005 statements regarding the release of Yahoo!’s publisher 21 network for small and medium size publishers (“Yahoo! Publisher Network”) contained in ¶139

22 were false and misleading when made. The true facts known to or recklessly disregarded by 23 defendants were as follows: 24 (a) According to CW 12, Yahoo! launched YPN in August 2005 in an attempt to 25 compete with Google’s AdSense and it was a total failure. ¶¶205(j)-(k)). As explained in ¶205(j)-

26 (k), CW12 confirms that YPN allowed Yahoo! to recognize millions in revenue, however, the 27 revenue was primarily generated by low quality affiliates, thereby exacerbating the problems that 28 Yahoo! was already having with these affiliates. Defendants failed to disclose that although YPN

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1 was a “new source of revenue” for Yahoo!, the bulk of revenue generated by YPN was bogus. 2 According to CW 12, customer complaints about poor quality affiliates and click fraud escalated after 3 the launch of YPN. CW8 corroborates CW12 (¶201(b)). According to CW8, poor quality clicks 4 from Yahoo!’s low quality partners increased dramatically after Yahoo! launched YPN. CW8 5 confirms that following YPN’s launch, Yahoo! aggressively pursued revenue sharing agreements 6 with domain affiliates and aggregators, including bloggers. According to CW8, YPN created an 7 easy way for Yahoo! to increase revenues without having to “break [it] out” when reporting paid 8 search results to Wall Street. CW8 confirms that the creation of YPN in the summer of 2005 was an 9 attempt by Yahoo! senior management to compete with Google, which was continuing to take 10 market share from Yahoo! and a way to make up for revenues that were being lost by the delay in 11 Panama. According to CW8, because Yahoo! did not fully contemplate many technical issues, of 12 which defendants were aware, before releasing YPN, the launch in August 2005 was called the YPN 13 “beta version” so that Yahoo! could essentially disown responsibility for any problems that occurred. 14 CW8 confirms that defendants Nazem and Rosensweig anticipated the large increase in the volumes 15 of partners and traffic that YPN created. According to CW8, Rosensweig acknowledged to Paul 16 Vollen, the person in charge of Content Match, that releasing Content Match through YPN in August 17 2005 to the broader market of advertisers was crazy, but he wanted it done anyway in order to 18 increase revenue. CW8 attended several meetings with defendant Nazem, Phu Hoang and the 19 management at the Legacy Overture facility in Pasadena, at which Yahoo!’s strategy to gain

20 increased revenue by partnering with low quality domain affiliates that attracted large volumes of 21 “questionable traffic” was discussed. As a result of CW8’s participation in these meetings, CW8

22 states that defendants Nazem, Semel and Decker were well aware of this part of Yahoo!’s business 23 strategy as of the time the statements in ¶139 were made.

24 On August 8, 2005, Defendants Issued False and Misleading Statements About Content Match, the Release of Panama and the Integration of Overture 25 141. On August 8, 2005, Yahoo! gave a presentation at Pacific Crest Securities 26 Technology Forum to discuss its search business. Jeff Weiner, Yahoo!’s Senior Vice President of 27 Search, gave the presentation. During the Class Period, Weiner reported directly to Semel and 28

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1 Rosensweig on technical and engineering issues related to Panama. Weiner was also a member of 2 the Panama Steering Committee when it was formed in 2005. As Vice President of Search, during 3 the Class Period, Weiner was aware of all issues related to the development of Panama, which was 4 Yahoo!’s most important project during the Class Period. During the presentation, Weiner spoke 5 about Yahoo!’s search monetization improvements (Panama), Yahoo!’s efforts in preventing click

6 fraud and the integration of Overture. During the conference call, Weiner confirmed that benefits 7 from Panama would be realized by the end of 2005 and into 2006: 8 Unidentified Audience Member 9 You talked about the benefits to publishers from the Yahoo! Publisher Network. Can you talk about what the benefits are to the advertisers? 10 Jeff Weiner – Yahoo!, Inc. – SVP of Search 11 Sure. With regard to whether it’s the Yahoo! Publisher Network or 12 sponsored search on the Yahoo! Network or anyone of the branding opportunities, not just the performance marketing, I think in this day and age on the performance 13 marketing side it is demonstrable return on investment. And I think as long as we continue to help our advertising customer get a demonstrable return on investment 14 and increasingly become more efficient and improve the optimization process, we’re going to be creating value for them. 15 . . . By way of example, in terms of how we create value for advertisers, 16 earlier today some of you may have seen we announced that we released some APIs to some third party search engine marketing service providers. And in doing so, we 17 are facilitating the advertiser experience. So now advertisers in one place with their SCM can get the tools necessary to increasingly optimize their budgets. 18 And the flip side of that is that we are getting better data that is going to 19 enable us to prevent click fraud going forward. So I think that’s one example of how we’re creating value. 20 * * * 21 Unidentified Audience Member 22 Could you maybe talk about – I know (indiscernible) has talked about ‘06 23 improving the monetization in search, and there’s a lot of noise out there whether you might sort of change the auction based CPC model so it is more of a formula. 24 Can you maybe just talk a little bit about that and the opportunities? 25 Jeff Weiner – Yahoo!, Inc. – SVP of Search 26 Absolutely. I think when we start talking about the monetization side of the equation with regard to search, the first thing that I like to say is when we initially 27 acquired those companies, there was a very conscious effort made to prioritize and focus on improving the algorithmic experience. So acquiring those three search 28 technologies – Overture was a fourth company – integrating with Yahoo! a fifth

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1 company, and integrating them seamlessly over a five month span and so we could deploy our own world-leading search technology, it was a lot of effort. 2 . . . So our first priority was getting the quality of that search technology right 3 and integrating those assets until we had one team and that . . . was Yahoo! Search Technology. 4 Now we’re very excited because that team is in place, the foundation has 5 been created and we can leverage that world-class talent that world-class infrastructure and cross-pollinate to improve the monetization stuff. 6 * * * 7 Unidentified Audience Member 8 What is the process – I mean is this something where it[’]s one quarter you 9 approve coverage and maybe (indiscernible) might not know it because I know you guys don’t (indiscernible) search. Is this something where maybe six months from 10 now all three of these slowly happen where they click, where you just get like a huge gap in terms of basis points (indiscernible) search. I know people are paying for 11 every hundred basis points, an increase of tax (ph) and increase the output of (indiscernible). 12 Jeff Weiner – Yahoo!, Inc. – SVP of Search 13 Yes. . . . I think as far as what we have officially said, and I don’t think I’m 14 going to change that, what Paula said and probably what Marta has said is you’ll start to see some changes by the end of ‘05 and you’ll see it in bigger changes in 15 ‘06. 16 Steve Weinstein – Pacific Crest – Analyst 17 Do you think these changes – do they tend to – in (indiscernible), would it have a gradual affect on improving monetization or is it a real catalyst? Do you roll 18 something out within a month? 19 Jeff Weiner – Yahoo!, Inc. – SVP of Search

20 It depends on the change. . . . Improving an algorithm can have an immediate impact insofar as better matching technology can create better coverage and I think 21 you will see the benefits of that immediately. 22 142. The statements contained in ¶141, which are attributable to defendants, were 23 materially false and misleading when made. The true facts which were known to or recklessly 24 disregarded by defendants were as follows:

25 (a) CW8 confirms that Weiner’s statements in ¶141 that changes from Panama 26 will be seen “by the end of ‘05” and “you’ll see it in bigger changes in ‘06” and “I think you will see

27 the benefits of that immediately” were all statements relating to Panama because the purpose of 28 Panama was to increase monetization. According to both CW8 and CW 12, during the Class Period,

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1 Panama was the only ongoing project that the Company was relying on to increase monetization of 2 its paid search business.

3 (b) Weiner’s statements in ¶141 that changes from Panama will be seen “by the 4 end of ‘05” and “you’ll see it in bigger changes in ‘06,” were false and misleading when made

5 because virtually no work had been done on Panama as of August 2005. As explained in ¶137(a) 6 above, Panama could not be released, and thus no benefits realized, until each step of the project was 7 complete. As of August 2005, there was no credible plan in place for the development of Panama. 8 The resources for Panama were not authorized until October 2005, the actual writing of the code for 9 Panama did not start until 2006, and there was no credible migration plan until August 2006. Thus, 10 as of August 2005, Weiner had no reasonable basis for stating changes from Panama would be seen 11 by 2005 or in 2006. 12 (c) Weiner’s statements in ¶141 that Yahoo! was getting “better data that is going 13 to enable us to prevent click fraud going forward,” was false and misleading because at the time 14 Yahoo! was still lacking in its capability to filter and prevent this type of traffic. As explained in 15 ¶¶205(h)-(n), according to CW 12, Google was dominating the market by 2005 and when Yahoo!’s

16 revenues suffered as a result, Yahoo! relied on improperly billed click revenue to meet forecasts. 17 CW12 confirmed that throughout the Class Period, Yahoo! failed to institute more sophisticated 18 click detection standards and systems, although it had the ability to do so. Yahoo! was maintaining 19 the practice of delaying refunds which also served to increase revenues, and, according to CW12,

20 complaints regarding click fraud increased at quarter end thereby suggesting that the click fraud 21 detection devices that were in place were manipulated to meet quarter revenue goals. Furthermore, 22 according to CW8, on August 3, 2005, Yahoo! released YPN through which Yahoo!’s customer’s 23 ads were available to more low quality affiliates, such as bloggers, which increased click fraud and 24 made click fraud a much bigger problem for Yahoo!. As explained in ¶¶205(j)-(k), YPN allowed

25 Yahoo! to recognize millions of dollars in bogus revenue through lower quality affiliates that Yahoo! 26 aggressively signed up after YPN was launched.

27 (d) Weiner’s statement in ¶141 that Overture was integrated “seamlessly” was 28 false and misleading when made because, as explained in ¶¶95(a)-(h), the Overture integration was

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1 anything but seamless. After the acquisition of Overture, the Overture platform was severely 2 overloaded due to increased traffic which resulted in system shutdown, user dissatisfaction, and 3 overall poor business performance. Furthermore, the culture clash between Yahoo! and Overture 4 engineers impacted Yahoo!’s ability to smoothly integrate Overture. Details of the false and 5 misleading nature of Weiner’s statement regarding the integration of Overture are confirmed by 6 CW10, CW11, CW12, and CW15, as set forth in ¶95(a)-(b).

7 On October 18, 2005, Defendants Issued False and Misleading Statements About Yahoo!’s 3Q 05 Financial Results and the Release of Panama 8 143. On October 18, 2005, Yahoo! issued a news release over the Business Wire in which 9 it reported Yahoo!’s financial results for 3Q 05 and defendant Semel talked about Yahoo!’s 3Q 05 10 continued “solid” growth and record revenues. Decker also commented on the strong 3 Q 05 results 11 and talked about the power of Yahoo!’s business model. The release stated in pertinent part as 12 follows: 13 “Yahoo! had another record quarter and continued to see solid growth across 14 our business. We introduced a number of new and innovative products and services and continued to provide more effective means for advertisers to engage with 15 consumers,” said Terry Semel, chairman and chief executive officer, Yahoo!. “Our ongoing ability to execute against plan and utilize our industry-leading technology 16 continues to position us for long-term growth and enables us to provide our users with the best content and most relevant online experience.” 17 Consolidated Financial Results 18 a Revenues were $1,330 million for the third quarter of 2005, a 47 percent 19 increase compared to $907 million for the same period of 2004.

20 a Marketing services revenue was $1,160 million for the third quarter of 2005, 21 a 46 percent increase compared to $797 million for the same period of 2004.

22 a Revenues excluding traffic acquisition costs (“TAC”) were $932 million for the third quarter of 2005, a 42 percent increase compared to $655 million for 23 the same period of 2004.

24 a Gross profit for the third quarter of 2005 was $810 million, a 41 percent increase compared to $574 million for the same period of 2004. 25 26 a Operating income for the third quarter of 2005 was $270 million, a 57 percent increase compared to $172 million for the same period of 2004. 27 a Net income for the third quarter of 2005 was $254 million or $0.17 per 28 diluted share (including a net impact of $16 million, or $0.01 per diluted

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1 share, related to the sales of investments). For the same period of 2004, net income was $253 million or $0.17 per diluted share (including a net impact 2 of $129 million, or $0.09 per share, related to the sale of an investment and an associated tax benefit). 3 4 “We are extremely pleased with our third quarter results, which exceeded expectations, showing strong revenue growth, continued profitability, and significant 5 free cash flow,” said Susan Decker, chief financial officer, Yahoo! “Our ability to deliver another quarter of record results, while also investing in internal operations 6 and external acquisitions, continues to reinforce the power of our business model.” 7 144. Yahoo!’s 3Q 05 results were later filed with the SEC in Yahoo!’s 3Q 05 Form 10-Q, 8 signed by Decker. This Form 10-Q report contained Yahoo!’s 3Q 05 financial results, including 9 those previously publicly recorded. The Form 10-Q also contained the false Sarbanes-Oxley 10 certificates signed by defendants Semel and Decker and statements about Yahoo!’s internal controls

11 (see ¶¶292-295). 12 145. On October 18, 2005, Yahoo! hosted a conference call with analysts and investors to 13 discuss Yahoo!’s 3Q 05 results, current business operations and future prospects. Defendants Semel, 14 Decker, and Rosensweig participated in the conference call and had an opportunity to address 15 analysts’ and investors’ questions and concerns. During the call, defendant Semel commented on 16 the strength of Yahoo!’s search products and search monetization efforts (Panama) and assured 17 investors that search monetization efforts were on track:

18 Terry Semel – Yahoo! Inc. – Chairman, CEO 19 Thank you, Paul and good afternoon, ladies and gentlemen. Yahoo! has continued its run of exceptional growth. Our relentless focus on our consumers and 20 continued investments in people and infrastructure has led to increased product quality and a powerful rate of innovation which are really paying off. 21 * * * 22 So let’s turn now to the monetization side of the equation. We are making 23 significant investments in our diverse monetization capabilities and we continue to see excellent results. Our marketing services business delivered almost $1.2 billion 24 in revenue for the quarter, representing 46% year-over-year growth as a result of strong contributions by all forms of advertising. 25 * * * 26 Search advertising continues to be a very, very exciting opportunity for us 27 and of course, as one of our most important priorities. We’re right on plan, improving and growing our monetization capability and see this area as providing 28 real upside for Yahoo! in the near future.

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1 146. During the October 18, 2005 conference call, when questioned about Yahoo!’s search 2 monetization efforts (Panama), defendant Decker responded that the benefits from Yahoo!’s efforts 3 would hit late 2005 and the financial impact would build throughout 2006: 4 Anthony Noto – Goldman Sachs – Analyst 5 * * * 6 Terry, you had mentioned monetization. Could you comment on what – sponsored leads on search on Yahoo!.com? Thanks. 7 * * * 8 Sue Decker – Yahoo! Inc. – CFO, Exec. VP 9 * * * 10 On the sponsored search side we think the key is to focus on the fundamentals of the 11 industry and how much revenue each of those advertisers are generating. Whether it’s more inventory or revenue per search but getting into the specifics on queries our 12 worldwide trends on Yahoo! sites and our affiliates are up very strong double digits. 13 * * * 14 The last question is monetization and where is that going to go? And I think I’ll just remind you what we said before, which is you know, when we acquired overture we 15 first focused on the algorithm side. After that we turned our attention to the monetization side of the equation and a lot of our plans this year were all about 16 developing a product suite. A very sequenced product suite in terms of how we could improve our monetization and we see that as all upside from where we are 17 now. What we said is we expected to see some of those products start to hit and benefit late this year and then the financial impact really to build throughout 2006. 18 Since there’s been a lot of speculation on exactly what that is and what we’re 19 doing I think we’ll share a little more transparencies on the product suite that drives that. So just to review, Terry talked a little bit about the Yahoo! publisher network 20 which was launched in beta in August and [will] be more widely available in beta in Q1 of 2006. So that’s one important bucket of activity that we expected and has 21 already been launched. Second broad bucket is our improving matching capabilities. Over the last couple of quarters we’ve been rolling out new capabilities that enhance 22 matching that leads to overall increase[d] coverage and better RPS. 23 We’re continuing to enhance those tools to broaden our matching capabilities and we should see changes rolled out every quarter throughout the year but we’re 24 already start[ing] [to] see some benefit from that but we expect that to grow in 2006 as well. The third and final broad bucket of various initiatives is concerned around 25 improving our relevance and our click through rates of our paid listings. When our matching initiatives is largely focused on coverage and these are largely focused on 26 click throughs and better tools to advertisers. Our plan there is to begin testing some of those initiatives in the first half of ‘06 with a broader rollout thereafter. 27 All of these initiatives have been already much right on track and consistent 28 with our original plan which is to have a sequenced series of products building

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1 throughout next year and that’s why we have been advising you that we expect the financial impact to grow throughout 2006. 2 147. Based on the October 18, 2005 conference call and follow-up conversations with 3 defendants, analysts issued reports confirming defendants’ statements that initiatives from Yahoo!’s 4 monetization strategy (Panama) should benefit Yahoo! starting in late 2005 and build through 2006. 5 • Prudential Equity Group, LLC, issued an analyst report on October 18, 2005, 6 entitled, “YHOO: NICE 3Q, WITH TOP AND BOTTOM LINE OUTPERFORMANCE; RAISING ESTIMATES AS ONLINE 7 ADVERTISING TRENDS ARE STRONG HEADING INTO 4Q,” stating: 8 YHOO provided some insight into its monetization strategy: a tool aimed at small 9 publishers, better matching capabilities, improved click-through rates and better tools for advertisers. These initiatives should benefit YHOO starting late ‘05 and build 10 throughout 06. 11 * * * 12 YHOO provided limited insight into its ongoing monetization improvement strategy, which currently consist[s] of three initiatives. First, CEO Semel referred to 13 the Yahoo! publisher network, a self-serve tool aimed at tapping into the small and medium sized publisher network. A beta version of the service was launched this 14 past August, and will be more widely available (still in beta) in 1Q’06. The second initiative is improving and enhancing search-matching capabilities, with the goal of 15 increased advertising coverage ratios and higher revenue per search. The company continues to roll out changes in its algorithms as they are ready, and management 16 reports that it is already seeing some benefit from the enhancements. The third initiative is focused on improving YHOO’s relevance and click through rates on paid 17 listings, as well as getting more useful tools to advertisers. YHOO plans to begin testing some of these initiatives in 1H’06 with a broader roll out thereafter. 18 YHOO expects these monetization plans to begin to benefit the company 19 late this year, with the bulk of the financial impact building throughout 2006. 20 • William Blair & Company reported on October 19, 2005, that:

21 Most important, the outlook seems to be strengthening as the company is progressing at or above internal expectations against many of its growth initiatives. 22 Management highlighted the progress it is making in search monetization, which is beginning to have a favorable impact on results that slowly build and become 23 more meaningful as we enter next year – which could be a key driver to upside earnings revisions. 24 * * * 25 Management highlighted the three key areas of monetization including: new 26 offerings such as the Yahoo Publisher Network, which was launched in beta in August and opens the company’s paid listings database to smaller media properties; 27 the ongoing enhancement of advertiser tools and extended search coverage; and an upgrade to the company’s ranking algorithms in early 2006 that likely will 28 incorporate relevancy and price into the ranking of company’s paid listings.

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1 • Bear Stearns reported on October 19, 2005, that:

2 – Monetization improvements are still expected although management reiterated that their real financial impact is not likely to be seen until we enter 3 2006. Efforts in focus include 1) expanding the Yahoo! Publisher Network beyond larger publishers such as USA Today, Viacom and iVillage to include more small to 4 medium sized publishers 2) improving matching capabilities, and 3) increasing click through rates. 5 • Bear Stearns reported on October 24, 2005, that: “Yahoo is clearly trying to 6 improve search monetization. Management highlighted on their conference 7 call earlier this week that we should see the fruit of these efforts in 2006.” 8 148. Defendants’ statements on October 18, 2005, as contained in ¶¶143-146, which were 9 false and misleading, had a direct effect on Yahoo!’s stock which increased to $35.91 on October 19, 10 2005 from $33.70 on October 18, 2005, going up approximately three times the average trading 11 volume and continued to trade at artificially inflated levels.

12 149. Defendant’s October 18, 2005 statements contained in ¶¶143-146 regarding Panama 13 were materially false and misleading when made. The true facts which were known to or recklessly 14 disregarded by defendants were as follows:

15 (a) Defendant Semel’s October 18, 2005 statement as contained in ¶145, that 16 Yahoo!’ is “right on plan, improving and growing our monetization capability,” is a statement

17 referring to Panama, according to CW8. CW8 also confirms that Decker’s statements in ¶146 that 18 some of the products will “benefit late this year” and that the Company is “right on track” with its

19 initiatives and that financial impact from them is expected to grow throughout 2006, also refer to

20 Panama. According to both CW8 and CW 12, during the Class Period, Panama was the only ongoing 21 project that the Company was relying on to increase monetization from its paid search business.

22 (b) As of October 2005 when the statements in ¶¶145-146 were made, defendants 23 Nazem, Semel, Rosensweig and Decker knew, or recklessly disregarded, that it was impossible for

24 the Company to realize any economic benefits from Panama in 2005 or 2006. As explained in 25 ¶137(b), Panama could not be released until each step of the project was complete. As of October 26 2005, there was still insufficient work done on the project. As explained above in ¶137(b), resources 27 for Panama were just authorized in October 2005, the writing of the code did not start until 2006 and 28 there was no credible migration plan until August 2006. According to CW 1 and CW8, by October

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1 2005, defendants were pushing the engineers to complete Panama by April 2006, however, both 2 witnesses state that this was an impossible schedule. According to CW8, the April 2006 completion 3 date was conceived in August 2005 when defendant Nazem was making unrealistic demands that the 4 Panama platform be completed in nine months or less. According to CW8, it was not until 5 November 2005 that there was sufficient information for a reliable release date to be projected by 6 management. CW8 states that even then, after the engineers were assigned to their various rolls and 7 realistically assessed the work that had to be done, the engineers told Nazem that neither an April 8 2006 or 2Q 06 completion date was possible. However, according to CW8, David Ku, a member of 9 the Panama management team, kept pressuring the engineers for an April 2006 completion date and 10 imposing unrealistic schedules on the engineers at defendant Nazem’s directive. During the 11 development of Panama, Mark Morrissey, one of the Panama’s product development leaders, 12 prepared and distributed regular updates to the Steering Committee on the status of Panama. 13 According to a November 9, 2005 Panama update from Morrissey to the Steering Committee, 14 Morrissey noted that the time deadlines for releasing Panama were coming from top management 15 (“top down” time limit) and that no credible timeline for release could be developed until the 16 resources for Panama were in place.

17 (c) CW8 confirms that even if Panama could be completed by 2Q 06, the 18 migration process would still take time, and as discussed above in ¶137(b), no revenues would be 19 realized from Panama until the advertising customers were migrated to the new platform and the new

20 monetization system was turned on. As of October 2005, according to CW8, defendants still had no 21 credible plan in place for the complex task of migrating customers over to the new Panama platform. 22 According to CW8, defendants had given migration a two-month time frame, but it was not 23 supported by any reliable information. CW8 confirms that the two month migration schedule was 24 merely a deadline that worked for defendants’ schedule, but there was no reasonable basis to support 25 that it could be accomplished in that time frame. CW8 states the migration process required input 26 from Yahoo!’s sales department, which dealt directly with the advertising customers and would be 27 working with the customers during the migration. CW8 confirms that defendants simply calculated 28 the time for the migration by doing a gross calculation of the number of advertisers they could

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1 technically move in a day and failed to take into account the realities of moving over a half-million 2 customers to a new platform. According to CW8, as of October 2005, there was no communication 3 between the engineers and the sales department regarding the details of the migration plan, which 4 was essential for a smooth transition. In August 2006, when defendants finally consulted with the 5 sales department on the migration plan, thereby taking into account technical and human elements of 6 the process, the migration schedule was increased from two to six months and was ultimately 7 completed in April 2007. CW8 confirms the defendants had prior experiences with migration of 8 other products and knew of the technical difficulties and difficulties working with customers but, 9 according to CW8, defendants did not account for those issues in the Panama migration schedule 10 because of the pressure to get Panama released.

11 (d) Yahoo’s reported 3Q 05 financial results contained in ¶143 and in its 12 subsequently filed Form 10-Q filed with the SEC were false and misleading because the 3Q 05 13 financial results included improperly recognized revenue from click fraud (¶¶47-59).

14 (e) As detailed in ¶¶259-274, during 3Q 05, Yahoo! improperly recognized 15 21.5% of its paid search revenue – which constituted approximately 35% of the total Marketing 16 Services Revenue in 3Q 05 – attributable to click and distribution fraud – or $87,290,000 because 17 this revenue was actually non-billable to Yahoo!’s advertising customers (¶¶47-59).

18 (f) As detailed in ¶¶280-282, during 3Q 05, Yahoo! failed to properly record a

19 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies.

20 (g) As detailed in ¶¶283-291, Yahoo! failed to disclose, as required by SEC 21 Regulation S-K, known trends and uncertainties by not reporting the practice of improperly 22 recognizing revenue generated by click and distribution fraud and thereby not disclosing Yahoo!’s 23 actual financial performance.

24 (h) As detailed in ¶¶292-295, Yahoo! publicly issued financial statements which 25 violated fundamental accounting principles requiring that such statements contain complete and 26 reliable information presented in a conservative manner regarding how managers discharged their 27 stewardship responsibilities to the Company and the actual financial performance of the Company. 28

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1 (i) As detailed in ¶¶259-274, during 3Q 05, as a consequence of the 2 aforementioned practices, the Company’s revenues and net income were artificially inflated and 3 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by 4 $87,290,000 and net income was overstated by $0.06 per share. 5 150. With knowledge of the true facts set forth in ¶149, defendant Semel sold 3,000,000 6 shares of Yahoo! stock between October 24 and October 28, 2005 for total proceeds of 7 $105,929,339, defendant Decker sold 403,333 shares of Yahoo! stock between November 2 and 8 November 16, 2005 for total proceeds of $15,760,425, and Nazem sold 811,052 shares of Yahoo! 9 stock between October 26, 2005 and November 23, 2005 for total proceeds of $31,220, 364.

10 On January 17, 2006, Defendants Issued False and Misleading Statements About Yahoo! ’s 4Q 05 and FY 05 Financial Results, and Partially Disclosed a Delay in the Release of 11 Panama 12 151. On January 17, 2006, Yahoo! issued its 4Q 05 and FY 05 results: 13 Fourth Quarter 2005 Financial Results 14 – Revenues were $1,501 million for the fourth quarter of 2005, a 39 percent increase compared to $1,078 million for the same period of 2004. 15 – Marketing services revenue was $1,315 million for the fourth quarter of 16 2005, a 39 percent increase compared to $943 million for the same period of 2004. 17 – Revenues excluding traffic acquisition costs (“TAC”) were $1,068 million 18 for the fourth quarter of 2005, a 36 percent increase compared to $785 million for the same period of 2004. 19 * * * 20 Full Year 2005 Financial Results 21 – Revenues for the year ended December 31, 2005 were $5,258 million, a 47 22 percent increase compared to $3,575 million for 2004. 23 – Marketing services revenue was $4,594 million for 2005, a 47 percent increase compared to $3,127 million for 2004. 24 – Revenues excluding TAC for 2005 were $3,696 million, a 42 percent 25 increase compared to $2,600 million for 2004. 26 152. Defendants held a conference call with securities analysts on January 17, 2006, the 27 same day they released Yahoo!’s 4Q 05 results. During that call, defendants stunned investors with 28

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1 news that Panama monetization initiatives would be delayed until the second half of 2006 with more 2 realized benefits as 2007 progressed. Regarding Panama’s release, Decker stated: 3 We believe that after a deliberate and staged roll out of these search monetization efforts, beginning in the second half of 2006, we will begin to see the financial 4 benefits of these initiatives. Once these are fully rolled out and operational we expect a more significant incremental contribution to 2007 revenue and beyond. 5 * * * 6 Regarding click through rate, we do have a number of relevancy initiatives 7 that we’ve said in the past we would begin testing in the first half and we would roll out thereafter. . . . 8 As I mentioned in the comments, we will start to see more benefit of that in 9 the back half but more meaningful as we move into ‘07 after we’ve had full roll out of the initiatives. 10 153. As reported by the Associated Press on January 18, 2006: 11 Yahoo Inc.’s shares dropped more than 12 percent Wednesday as investors 12 expressed their disappointment with the Internet powerhouse’s inability to reap bigger gains as advertisers shift more of their spending to the Web. 13 154. Based on the conference call and follow-up conversations with defendants, analysts 14 following Yahoo! also commented on the delay in Panama: 15 • Oppenheimer’s January 18, 2006 report states: “Minuses: search 16 improvements most likely 2H06 story, TAC continues to increase. The company lags competition in monetizing search and it seems improvements 17 are not in the cards in 1H06.” 18 • RBC Capital Markets’ January 18, 2006 report states: 19 Examining the Issues with the 4Q 05 Earnings Report 20 We are quite aware that the quarter and guidance raised a few questions about 21 the sustainability of Yahoo’s growth. In particular, the growth in page views was anemic, there was a loss of momentum in international search revenue, and the 22 margin guidance was lackluster . . . .

23 * * * 24 Management Seemed Disconnected from Reality: Yahoo CEO Terry Semel seemed to focus so much on the positives on Yahoo’s quarterly results that he 25 seemed a bit disconnected from reality. We wished there was some public acknowledgement of the company’s mixed results, but did not get such a reaction. 26 We believe this approach only served to make investors more frustrated, as the share price told a different story. 27 28

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1 • SG Cowen & Co.’s January 18, 2006 report states: “ Yahoo’s monetization efforts have been slow to materialize. . . . Yahoo is losing market share in 2 paid search . . . .

3 155. On February 27, 2006, defendants Semel and Decker attended a Bear Stearns media 4 conference. According to a February 28, 2006 analyst report issued by Bear Stearns: 5 CEO Terry Semel and CFO Sue Decker gave an upbeat presentation and 6 commented on the 2006 outlook, prospects for its display (formerly branded) and search units, current ad trends and an update on international. 7 Yahoo reiterated its 2006 guidance but did comment that they hope to beat 8 market growth (~25-30%) particularly in display advertising where growth has been particularly impressive in recent quarters. Search advertising growth is expected to 9 be healthy and over the long run should benefit from improvements in search monetization which could begin in late 2006. 10 156. As a result of defendants’ partial disclosures, Yahoo!’s stock declined over 10% on 11 118 million shares – more than five times Yahoo!’s normal trading volume. With investors

12 pressuring Yahoo! to implement a new search system to compete with Google, defendants now 13 promised investors that Panama would be in place by the second half of 2006 to better monetize 14 searches and stop the bleeding of market share to Google. Prior to this announcement, investors had 15 expected the new search system to be in place in the first half of 2006 – an Oppenheimer analyst 16 report dated January 18, 2006, stated, “[w]e view this delay as a negative for the company as Google 17 . . . continues to gain relative share,” and a Stanford Group report issued the same day stated, 18 “Yahoo management indicated that monetization gains in its search business could take longer to 19 realize than we had anticipated, citing no meaningful impact until 2007.” Bear Stearns analysts

20 stated in a January 18, 2006 report: “Concerns [–] Yahoo has a relatively weak market position in 21 search. Yahoo’s monetization efforts lags Google and translates into weaker revenue in this 22 segment. Benefits from improvements in monetization may impact revenues later that [sic] the 23 market perceives.” 24 157. Defendants’ statements on January 17, 2006, contained in ¶¶151-152 and 155 25 regarding Yahoo!’s 4Q 05 and FY 05 financial results and the release of Panama were false and

26 misleading when made. The true facts which were known to or recklessly disregarded by defendants 27 were as follows: 28

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1 (a) Decker’s statements during the January 17, 2006 conference call contained in 2 ¶152, that the Company would begin seeing results from its search monetization efforts “in the

3 second half of 2006” and the Company would start to see more benefit in the “back half” of 2006 4 were all related to the release of Panama according to CW8. As discussed above in ¶137(a), Panama 5 was expected to increase search monetization and relevancy in its ad ranking system and, according 6 to CW8 and CW12, all statements about monetization during the Class Period were related to 7 Panama.

8 (b) Defendant Decker’s statements during the January 17, 2006 conference call 9 were false and misleading when made because a second-half 2006 release of Panama was 10 impossible. As of early December 2005, the Operating Committee informed the Steering 11 Committee, which included Nazem and Weiner, that Panama could not be released until August 1, 12 2006, which meant that no benefits could be realized from Panama until after migration, which 13 ultimately took six months. According to CW8, in December 2005 the Steering Committee 14 discussed the impact of slips in the Panama schedule on corporate earnings. The Steering 15 Committee would have reported this information to the Executive Sponsorship Committee. 16 According to CW8, the Operating Committee assigned August 1, 2006, as the external release date 17 and July 1, 2006, as the internal release date. CW8 confirms that the internal release date was set to 18 make sure that the external date would be met. According to the Panama schedule as of January 19 2006, defendants were still forecasting a two-month migration schedule without any reasonable

20 basis. As explained in ¶137(b), it was not until August 2006 that defendants had a credible 21 migration plan in place. Thus, defendants had no reasonable basis to believe that a second-half 2006 22 release would be possible when they made their statements on January 17, 2006.

23 (c) As detailed in ¶¶259-274, during 4Q 05, Yahoo! improperly recognized 24 21.5% of its paid search revenue – which constituted approximately 35% of the total Marketing 25 Services Revenue in 4Q 05 – attributable to click and distribution fraud – or $98,900,000 because

26 this revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

27 (d) As detailed in ¶¶280-282, during 4Q 05, Yahoo! failed to properly record a

28 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies;

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1 (e) As detailed in ¶¶283-291, during 4Q 05, Yahoo! failed to disclose, as required 2 by the SEC Regulation S-K, known trends and uncertainties by not reporting the practice of 3 improperly recognizing revenue generated by click and distribution fraud and thereby not disclosing 4 Yahoo!’s actual financial performance;

5 (f) As detailed in ¶¶292-295, during 4Q 05, Yahoo!’s publicly issued financial 6 statements violated fundamental accounting principles requiring that such statements contain 7 complete and reliable information presented in a conservative manner regarding how managers 8 discharged their stewardship responsibilities to the Company and the actual financial performance of 9 the Company;

10 (g) As detailed in ¶¶259-274, during 4Q 05, as a consequence of the 11 aforementioned practices, the Company’s revenues and net income were artificially inflated and 12 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by

13 $98,900,000 and net income was overstated by $0.07 per share. 14 158. Defendants’ statements on and about January 17 and February 27, 2006, which were 15 false and misleading when made, had a direct effect on Yahoo!’s stock price which continued to 16 trade at artificially inflated levels. 17 159. On April 5, 2006, Dow Jones Newswire issued an article entitled, “Yahoo Search 18 Advertisers Face Click-less Fraud,” stating: 19 Yahoo Inc. (YHOO) search advertisers are being filched by a new form of click fraud perpetrated without the use of any actual clicks, according to spyware 20 expert Ben Edelman. 21 In an online report published Tuesday, Edelman says spyware makers are profiting by faking user clicks on Yahoo search ads. The lawyer and Harvard 22 doctoral candidate, who has made waves with his spyware research in the past, urged the Internet giant to vet its partner network more thoroughly, prohibit its partners 23 from resyndicating Yahoo ads and step up its fraud-detection efforts. 24 “Yahoo’s problem results from bad partners within its network,” Edelman says. “Yahoo syndicates ads to numerous partners, many of whom syndicate ads to 25 others, some of whom then syndicate ads still further. The net effect is that Yahoo does not know who it’s dealing with, and therefore cannot exercise meaningful 26 supervision over how its ads are displayed.” 27 * * * 28

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1 UBS analyst Benjamin A. Schachter said in a research note to clients Wednesday that Edelman’s report reinforced his concerns about Yahoo’s ability to 2 police its partner network. Though he said the amount of fraud occurring is probably small in dollar terms, the credibility of Yahoo’s network in advertisers’ eyes is at risk 3 and the problem could spawn unwanted lawsuits and attention from prosecutors, he said. 4 160. This article furthered media scrutiny on the issue of click fraud and Yahoo!’s affiliate 5 network. 6 On April 18, 2006, Defendants Issued False and Misleading Statements About Yahoo!’s 1Q 7 06 Financial Results and Promised Investors that Panama Would Be Done by Year End 8 161. Because Yahoo!’s stock price had declined 20% in the first quarter of 2006, 9 defendants knew they had to issue positive statements about Panama and its search business when 10 discussing Yahoo!’s 1 Q 06 results. On April 18, 2006, Yahoo! announced 1 Q 06 results which met 11 investor expectations, and issued positive statements on the conference call regarding its search 12 business and Panama. As a result of these statements, Yahoo!’s stock price increased more than 7% 13 from $31.03 to $33.54.

14 162. On April 18, 2006, Yahoo! issued a news release over the Business Wire in which it 15 reported Yahoo!’s financial results for 1Q 06. The release stated in pertinent part as follows: 16 Yahoo! Inc. (Nasdaq: YHOO) today reported results for the first quarter ended March 31, 2006. 17 “Yahoo! had another strong performance this quarter. Our overall advertising 18 business saw solid growth and our user numbers continued to climb,” said Terry Semel, chairman and chief executive officer, Yahoo!. “We believe that our business 19 model and our focus on exploring new opportunities in emerging areas has set us apart from the competition and has enabled us to offer our users the best online 20 experience and our advertisers the most value online.”

21 First Quarter 2006 Financial Results

22 • Revenues were $1,567 million for the first quarter of 2006, a 34 percent increase compared to $1,174 million for the same period of 2005. 23 • Marketing services revenue was $1,3 81 million for the first quarter of 2006, a 24 35 percent increase compared to $1,025 million for the same period of 2005. 25 • Fees revenue was $186 million for the first quarter of 2006, a 25 percent 26 increase compared to $149 million for the same period of 2005. 27 28

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1 • Revenues excluding traffic acquisition costs (“TAC”) were $1,088 million for the first quarter of 2006, a 33 per-cent increase compared to $821 million 2 for the same period of 2005.

3 163. On the conference call held on April 18, 2006, defendants reinforced the idea that 4 Panama would be done by year-end 2006 with revenue growth accelerating in 1 Q 07, and that more 5 detail would be provided at the analyst day on May 17th. Analysts were relieved that search 6 monetization remained on track for a 2006 year-end implementation so that Yahoo! would not lose 7 further ground to Google.

8 • William Blair & Company’s April 19, 2006 report stated: “This dialogue and 9 the promise of much more at the analyst day on May 17 and beyond should restore some investor confidence in the company. . . . [M]anagement stated 10 that revenue growth from search monetization should accelerate once the new system is in place ....” 11 • ThinkEquity Partners LLC’s April 19, 2006 report stated: “Search 12 Monetization on Track.” 13 • Deutsche Bank’s April 19, 2006 report stated: “We acknowledge that 14 Yahoo!’s continued share losses to Google in search could pressure shares. However, we advise investors to remember that its new search monetization 15 platform is on track to launch in the 2H06 which should incrementally boost yield and revenues in late 2006/early 2007.” 16 • 17 Jefferies & Co., Inc.’s April 19, 2006 report stated: “Yahoo! results last night should alleviate concerns over the company’s growth prospects . . . .” 18 • Prudential Equity Group, LLC’s April 18, 2006 report stated: “YHOO: 19 OUTLOOK IS BRIGHTER AS THE COMPANY MOVES CLOSER TO ROLLING OUT ITS NEW SEARCH PLATFORM . . . .” 20 • UBS Analyst Schachter on the conference call stated: “First, congratulations 21 on keeping the monetization efforts on track. I think we’re all glad to hear 22 that.”

23 164. Defendants’ statements on April 18, 2006, contained in ¶163 were false or misleading 24 when made. The true facts which were known to or recklessly disregarded by defendants were as 25 follows:

26 (a) Defendants’ statements during the April 18, 2006 conference call, which 27 reinforced that Panama would be released by year-end 2006 with growth accelerating in 1 Q 07, were 28 false and misleading when made because, according to Panama scheduling documents, the migration

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1 phase still had no credible schedule in place. As of April 18, 2006, defendants were still scheduling 2 for a two-month migration which, according to CW8, had no credible basis. By April 2006, the sales 3 department had not been consulted on the migration schedule. Once the sales department was 4 consulted, the schedule was more than doubled from two months to six months. As confirmed by 5 CW8, it was not until August 2006 that a detailed migration plan was developed (¶137(b)). 6 According to the August migration schedule, the migration was to take place in four phases and was 7 not expected to be complete until April 2007.

8 (b) By 2006, the Operating Committee was documenting and reporting to the 9 Steering Committee confidence indexes as to the likelihood of meeting the August 2006 release date. 10 According to CW8, in February 2006, the Operating Committee told Nazem that there was no way a 11 May 2006 release date was possible. On March 1, 2006, the Operating Committee informed the 12 Steering Committee, which included Nazem who reported directly to Semel, and Weiner and Meisel 13 who reported directly to Rosensweig, a 70% confidence index for the August 1, 2006 external 14 release and a 60% confidence index for the July 1, 2006 internal release. As of March 22, 2006, the 15 Operating Committee reported to the Steering Committee a significantly lower confidence index on 16 the release dates because of complications with purchasing the hardware for the project and because 17 the code was only 49% complete as of March 22, 2006. According to CW8, in March 2006, the 18 Operating Committee figured out that the project needed $31 million for hardware rather than $13 19 million. As a result of these problems, the Operating Committee reported to the Steering Committee

20 a lowered confidence index of 60% for the August 2006 external release and a 50% confidence 21 index for the July 2006 internal release. According to CW8, who was on the Operating Committee, 22 as of March 2006 there was no chance that either the August 2006 external date or July 2006 internal 23 date could be met because of the work that needed to be completed. CW 1 also reported that in April 24 2006 he told Nazem in a weekly Operating Committee meeting that the August 2006 date could not 25 be met. Based on the foregoing and the fact that migration still had to take place, there was no 26 reasonable basis for defendants’ statements that benefits from Panama would be seen in the second- 27 half 2006. 28

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1 (c) According to CW1, who was a member of the Operating Committee that 2 reported directly to the Steering Committee, that s/he met with Nazem in April 2005 and told him 3 that the Panama schedule had slipped once again and a 3Q launch and 4Q 06 full implementation 4 was not possible. As a member of the Steering Committee, Nazem reported this information directly 5 to the Executive Sponsorship Committee, which included Decker, Semel and Rosensweig.

6 (d) As detailed in ¶¶259-274, during 1Q 06, Yahoo! improperly recognized 7 21.5% of its paid search revenue – which constituted approximately 38% of the total Marketing 8 Services Revenue in 1Q 06 – attributable to click and distribution fraud – or $112,875,000 because

9 this revenue was actually non-billable to Yahoo!’s advertising customers ( see ¶¶47-59);

10 (e) As detailed in ¶¶280-282, during 1Q 06, Yahoo! failed to properly record a

11 loss contingency in violation of GAAP, as set forth in SFAS No. 5, Accounting for Contingencies; 12 (f) As detailed in ¶¶283-291, during 1Q 06, Yahoo! failed to disclose, as required 13 by SEC Regulation S-K, known trends and uncertainties by not reporting the practice of improperly 14 recognizing revenue generated by click and distribution fraud and thereby not disclosing Yahoo!’s 15 actual financial performance;

16 (g) As detailed in ¶¶292-295, during 1Q 06, Yahoo!’s publicly issued financial 17 statements violated fundamental accounting principles requiring that such statements contain 18 complete and reliable information presented in a conservative manner regarding how managers 19 discharged their stewardship responsibilities to the Company and the actual financial performance of

20 the Company; 21 (h) As detailed in ¶¶259-274, during 1Q 06, as a consequence of the 22 aforementioned practices, the Company’s revenues and net income were artificially inflated and 23 reported financial results were in violation of GAAP in that the Company’s revenue was inflated by 24 $112,875,000 and net income was overstated by $0.08/per share.

25 165. On May 4, 2006, it was reported in Tech Web that Yahoo! had been sued by its 26 advertisers for improperly charging them for ads that were placed into spyware programs and “fake” 27 clicks on those ads. The lawsuit had been brought by spyware researcher ad attorney Ben Edelman, 28

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1 who had posted reports critical of Yahoo! on the internet in August 2005 and April 2006, presenting 2 findings that Yahoo! had engaged in syndication fraud. The article stated: 3 Advertising service companies and industry experts put the general prevalence of fraudulent clicks at somewhere between 14% and 30% overall . . . . 4 * * * 5 The allegations in this new case against Yahoo suggest that a significant 6 portion of search advertising profits come from illegal or disreputable activities. They also echo criticisms leveled at Internet service providers over the years to the 7 effect that ISPs knowingly profiting from similar shady practices, such as hosting spam servers. 8 According to Edelman, Yahoo has responded to some of his earlier criticisms 9 by terminating relationships with affiliates associated with questionable practices. But it’s not clear whether such steps or pending lawsuits can adequately resolve these 10 issues. 11 At the Ad:Tech Conference in San Francisco last week, advertising industry panelists – whose companies sell click fraud mitigation or reporting services – 12 stressed that click fraud is a real issue and criticized the lack of transparency in the search advertising industry. 13 Tom Cuthbert, president and CEO of click data analysis firm ClickForensics, 14 and one of the panelists at the conference, insists that click fraud is not as well managed as search engines claim. Over the last few months we’ve definitely seen an 15 increase in the robotic generation of clicks, he says. Clearly, that is a growing concern for advertisers. 16 166. On May 8, 2006, a Dow Jones Newswire article emphasized the importance of 17 Panama to Yahoo!’s future success: 18 Yahoo Inc. (YHOO) plans on Monday to reveal details of its much- 19 anticipated new system for search marketers, the success of which is vital to the Internet giant’s strategy for competing with archrival Google Inc. (GOOG). 20 The Sunnyvale, Calif., company hopes the new system, which it expects to 21 launch in the third quarter after more than a year in development, will improve advertiser satisfaction with its keyword-ad service and attract new participants. 22 Yahoo will release on Monday technology details, known as APIs, or application program interfaces, to third-party programmers in the advertising world who want to 23 build additional tools. 24 * * *

25 The search-advertising market was worth $1.6 billion in the fourth quarter of last year, up 44% from $1.1 billion the year-earlier period, according to the 26 Interactive Advertising Bureau and PricewaterhouseCoopers. Google has been expanding its market share, thanks largely to superior technology that has driven a 27 revenue-growth pace about double that of the market. 28

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1 Yahoo’s new technology for setting ad positions will use a quality score that incorporates a “big basket of measures,” including bid price and the rate at which 2 consumers click on ads, said Tim Cadogan, Yahoo’s vice president of search and sponsored search. To date, Yahoo has ranked ads based on bid price alone, which 3 hasn’t allowed it to make as much money as Google. 4 167. The statements in ¶166, attributable to defendants, were false and misleading when 5 made. The true facts known to or recklessly disregarded by defendants are set forth in ¶¶1 37(b), 6 149(a)-(c) and 157(a)-(b). Tom Cadogan was a member of the Panama Operating Committee during 7 the Class Period and had knowledge that Panama could not be released by 3Q 06.

8 168. On May 5, 2006, Yahoo! issued its 1Q 06 Form 10-Q signed by defendants Semel 9 and Decker, which contained the same false financial information it disclosed with its 1Q 06 results 10 in April 2006. The financial results contained in Yahoo!’s 1Q 06 Form 10-Q were false and

11 misleading when made and the true facts known to or recklessly disregarded by defendants are set 12 forth in ¶¶1 57(c)-(g).

13 169. On June 6, 2006, defendants Semel and Decker attended an investor meeting at 14 Prudential Equity Group and reiterated that Panama was on track. A June 7, 2006, a Prudential 15 report stated: “Management discussed its own Search monetization efforts, and it appears that the 16 marketplace component is on track for a broad launch in 4Q’06 . . . .” This statement was false or 17 misleading when made and the true facts known to or recklessly disregarded by defendants are set 18 forth in ¶¶137(b), 149(a)-(c) and 157(a)-(b).

19 The Truth Begins to Emerge 20 170. On July 18, 2006, Yahoo! shocked the market by issuing 2Q 06 results which 21 significantly missed defendants’ prior growth estimates with Yahoo!’s search revenue falling 4%

22 rather than rising 4%. Yahoo! also announced that Panama would be delayed yet once again. 23 Investors punished Yahoo!’s stock, sending it down over 22% on 204 million shares – over 10 times 24 its normal trading volume. Investors were troubled with defendants’ failure to explain why Panama

25 was delayed because it was expected to produce more than $100 million in additional revenue each 26 quarter. Analyst Safa Rashtchy stated, “‘I find it troubling’” that they gave a “‘nonanswer’” to 27 explain the delay. “Panamawful” stated a RBC Capital Markets report with “[m]anagement loses

28 some credibility due to the delay.” Another analyst (Pacific Crest) stated Panama was “ the

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1 company’s most material project” and the delay was “disappointing.” The disappointing Panama

2 delay news “was amplified by Q2’s weaker than expected search results” stated a Bear Stearns 3 analyst with “[s]earch was relatively weak” and “disappointing revenue per search.” A CIBC

4 analyst report stated “Reducing Outlook on Delays in New Platform Launch & Slowing Rev/Search 5 Growth” with “disappointing search monetization and revenue per search were responsible for the 6 weakness in US revenues.”

7 171. With a settlement of a click fraud lawsuit brought by advertisers of Yahoo!, the filing 8 of another lawsuit in May 2006, and increased media scrutiny of the problem of click fraud, Yahoo! 9 also announced that its search revenue was lower and its TAC rates had increased as it was forced to 10 continue to get rid of affiliate websites that were contributing to click fraud. (Semel – “we have 11 recently terminated relationships with publishers that didn’t drive traffic that met our standards”).

12 Yahoo!’s decision to acknowledge that it needed to address the click fraud issue it was previously 13 benefiting from would result in lower revenue and margin growth rates going forward. In response 14 to an analyst question about whether cutting off “poor traffic affiliates” would hurt revenue growth,

15 defendant Decker admitted on the July 18, 2006 conference call that “the total effect on our 16 rev[enue] ex-TAC took about 2 points off of our overall growth” and “[w]e expect that roughly 200 17 basis points impact to continue for the back half.” 18 172. In a July 20, 2006 Associated Press story, Semel admitted that “‘ [w]e are not 19 monetizing as well and that it is costing us a lot of money.’”

20 173. Other analysts also questioned Yahoo!’s results and believed part of the shortfall was 21 due to click fraud and concern over losing revenue from affiliate sites. A July 19, 2006 Deutsche 22 Bank report lowered its rating to “HOLD” and stated that the delay with Panama “certainly raises

23 question marks over the quality and/or management oversight of the search engineers.” With respect 24 to click fraud, the report stated: 25 Housecleaning in Search to Improve Traffic Quality 26 We believe the rising concerns over click fraud and likely lower conversion rates prompted the move to terminate low quality traffic relationships in Yahoo’s 27 search business. 28

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1 174. With statements that Yahoo! had click fraud under control and that Yahoo!’s Content 2 Match products increased advertising customers ability to generate quality advertising leads, Yahoo! 3 convinced investors that it was successfully competing with Google and that it was experiencing 4 strong advertising revenue growth that it could sustain. These statements were not true, however, 5 because over the course of many months following the July 18, 2006 disclosure that Yahoo! missed 6 expected growth estimates for 2006, it was revealed why Yahoo! announced declining search 7 revenue and that Yahoo! was forced to terminate relationships with poor quality affiliates. Over the 8 course of many months, it became clear that Yahoo! was forced to terminate its relationships with 9 “poor quality affiliates” because these affiliates were producing improperly recognized advertising 10 revenue via click fraud and other revenue not properly recognized. 11 175. During the Company’s July 18, 2006 earnings conference call Semel announced that 12 following a third-party click fraud audit Yahoo! had initiated in response to the click fraud lawsuits, 13 Yahoo! had adopted new “strict distribution partner guidelines” during the quarter and that “as a 14 result we have recently terminated relationships with publishers that didn’t drive traffic that met 15 [those new] standards.” Semel followed that up conceding “[i]nventory quality is an important

16 strategic issue to both our company and to the success of our industry overall.” 17 176. Yahoo! was forced to remove lower quality affiliates from their network because of 18 the intense media scrutiny of improperly recognized search revenue via click fraud. Due to the June 19 28, 2006 settlement of the Checkmate Strategic Group Inc. v. Yahoo! Inc., et al., Central District of

20 California, Case No. CV 05-4588 CAS (FMOx) class action alleging Yahoo! illegally charged online 21 advertisers millions of dollars in click-thru fees outside the terms of its contracts with advertisers 22 during the Class Period (hereinafter, the “Checkmate click fraud class action”) and the May 4, 2006 23 filing of the Drauker Development, et al. v. Yahoo! and Overture Services Inc., Central District of 24 California, Case No. CV06-2737 CAS (FOMx) class action alleging that Yahoo! collected sales 25 revenues from its advertisers in violation of the terms of Yahoo!’s advertising contracts and Overture 26 “Market Place Rules” and “policies” (hereinafter, the “Drauker syndication fraud class action”).

27 The increased media scrutiny of the problem of click fraud and syndication fraud in general forced 28 Yahoo! to disclose that the growth in its search revenues had fallen even lower and that its TAC

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1 rates had significantly increased as the Company was forced to continue to rid its affiliate network of 2 poor traffic quality partners that had traditionally driven higher margin click fraud-induced and

3 syndication fraud-induced online advertising revenues through Overture. 1 In particular, the promises 4 Yahoo! made in a June 28, 2006 announcement of the settlement of the Checkmate click fraud class 5 action to enhance and permanently reemploy its click fraud protection systems, to appoint a click 6 fraud czar and to refund and/or provide credits to advertisers for previously reported revenue would 7 diminished Yahoo!’s earnings model going forward. Moreover, removal of the poor traffic quality

8 affiliates from the Yahoo! network would remove much of the higher profit margin revenue from 9 Yahoo!’s revenue base going forward.

10 177. Later during the Company’s July 18, 2006 earnings conference call, Ben Schachter of 11 UBS asked “[o]n the partner quality issue, . . . could talk about how many partners you have 12 removed, and are they primarily US or are they primarily international, and how we should think 13 about that going forward. Will there be more to go?” Defendant Rosensweig responded that the 14

15 1 On June 29, 2006, Yahoo! announced it had settled a click fraud lawsuit and would be 16 providing advertisers with refunds for overcharges due to click fraud going back to January 2004. Yahoo! also announced it would appoint a traffic quality advocate and work with advertisers, 17 including greater access for advertisers to its click-through protection system.

18 A July 5, 2006 CNETNews.com article entitled, “Click fraud could threaten pay-per-click model,” increased media scrutiny on this issue. The article stated: 19 Online advertisers estimate that about 14.6 percent of the clicks on ads for which they’re billed are fraudulent, costing them about $800 million last year, 20 according to a study released Wednesday. 21 The study, called “Click Fraud Reaches $1.3 billion, Dictates End of ‘Don’t 22 Ask, Don’t Tell’ Era” and released by research and advisory firm Outsell, claims that “Google, Yahoo and MSN . . . are stonewalling on click fraud, to their own and others’ detriment.” 23 24 Search engines have refused to release figures on the amount of fraud in search advertising, most of which comes from Web sites boosting their revenue by clicking on ads on their own sites. 25 A recent study from the Click Fraud Network put the click fraud rate at 14 26 percent, while other companies that sell click fraud detection and prevention services have pegged it at 20 percent to 30 percent. Search companies say it is much lower 27 than that and is under control. 28

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1 “traffic quality issue . . . ha[d] been an ongoing process and [would] remain an ongoing process,” 2 now conceded that the situation would only improve when Yahoo!’s “technology g[ot] better, and 3 as [it was] able to catch these things faster, and as [it was] able to make sure [Yahoo!] sign[ed] on 4 fewer partners who might have the risk.” In his report issued later that day reducing his price target 5 for Yahoo! shares, “based on a triangulation of relative metrics and our DCF” (or “discounted cash

6 flow” valuation), UBS’s Schachter stated: 7 Search revenue was negatively impacted because the company removed low-quality partner sites from its network. Additionally, they stated that it will be an ongoing 8 process to keep only high-quality inventory in the Yahoo network. . . . 9 How did it get this far? This partner quality issue has been brewing for some time. The Overture sales team has always been aggressive, but we think 10 more recently they may have gone too far and allowed questionable partners into the network in order to replace some of the lost revenue from losing Microsoft. 11 These questionable partners then went on to distribute Yahoo sponsored links further and further away from the reach of Yahoo quality control. So while we are 12 pleased to see Yahoo addressing it head on, it raises questions about how it was allowed to get so far in the first place. 13 * * * 14 We believe that Yahoo made the decision to meaningfully combat partner-quality 15 issues in 2Q, and as a result saw incrementally lower revenue. 16 178. A Business Week story entitled “Yahoo’s Pop-Up Connection” was also just hitting 17 the newsstands on July 17, 2006, with Business Week’s Ben Elgin providing additional detail on 18 Yahoo!’s revenue recognition issues from third-party affiliate Direct Revenue: citing a former 19 Yahoo! sales executive acknowledging that Yahoo!’s senior management knew the illegal source of

20 revenues and acknowledging that Yahoo!’s senior executives intentionally turned the dial when 21 they needed to report more revenues – the article also cited Yahoo! spokesperson confirming the 22 Company was terminating relationships with problem partners:

23 Yahoo! Inc. has become one of the spyware industry’s main benefactors. Since 2003 the Sunnyvale (Calif.) titan has indirectly supplied ads to – and shared 24 millions of revenue dollars with – Direct Revenue and its rivals. 25 Yahoo boasts hundreds of thousands of advertising clients. It shows their ads on its own site and, for additional payments, passes some along to other online 26 publishers and distributors. Some of the distributors turn ads over to pop-up artists such as Direct Revenue. Fees are shared along the way. 27 * * * 28

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1 A former sales executive at Yahoo says the company knew that some of its ads were surfacing in spyware pop-ups. “It was a dial we could turn if we needed a 2 little more revenue,’’ the ex-executive says. Court and regulatory filings reveal that even with distributors in the middle, the Yahoo -Direct Revenue connection 3 generated hundreds of thousands of dollars a month for each company for much of 2004 and 2005. 4 179. In a report issued on July 19, 2008, Deutsche Bank opined on the adverse effect 5 removing high margin-producing – but low traffic quality producing – affiliates would have on 6 Yahoo!’s income model going forward: 7 Housecleaning in Search to Improve Traffic Quality 8 We believe the rising concerns over click fraud and likely lower conversion 9 rates prompted the move to terminate low quality traffic relationships in Yahoo’s search business. Click fraud is becoming more of an issue today, especially with the 10 proliferation of robot-based traffic, click farms and search arbitrage affiliates. In addition, advertisers will generally see high traffic volumes but at very low 11 conversion rates. While the company did not point to specific partners, we believe these low quality search relationships do however, drive a decent amount of traffic at 12 a lower TAC rate. Which is good for search profitability but creates low quality traffic for the advertiser, and likely causing PPC rates to come down. To fix this, the 13 company is focused on gaining quality search distribution, but probably also at a higher cost, to compete with the aggressive search engines also seeking quality 14 traffic (Google, MSN). There is, however new partnerships that could help with quality. The recent deal with eBay is a good start on improving its distribution. 15 While we believe the eBay deal is an overall positive for the marketing services business, we estimate TAC payouts to be as high as 80%+. As such, we still think 16 there is a challenge to gain access to high quality search distribution, as it will likely come at a high cost, impacting the profitability of the search business longer term. 17 180. After the Class Period, Yahoo! continued to issue poor results. On October 17, 2006, 18 Yahoo! announced even weaker 3Q 06 results than expected by investors, with Yahoo!’s stock price 19 declining to $23 per share. Yahoo!’s margin projections would again be slashed in early 2007 to “a 20 full-year [2007] margin of approximately 39% to 40%. . . . [citing the] impact of the traffic quality.” 21 Yahoo!’s actual margins fell to 38% by the 4Q 07, to 35% in the 1Q 08 and Yahoo! finally 22 dispensed with even reporting margins in 2Q 08 thereafter. 23 181. Discussing Yahoo!’s 3Q 06 financial results on October 18, 2006, Jeetil Patel at 24 Deutsche Bank reiterated that: 25 During the quarter, global paid search underperformed our expectations, coming in at 26 16%Y/Y growth. Given the company’s monetization issues, traffic quality improvement initiatives, and market share erosion, we believe in the near term, it 27 will likely remain at the 5%-15% Y/Y growth range until the new Panama search platform rolls out. Nonetheless, the significant slowdown in search revenues 28 (shortfall of up to $50mn in 3Q) represents a major concern into early 2007, at which

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1 point the new Panama search platform should drive an additional 10% in growth in 2H 2007. However, we think that near term uplift on search monetization may be 2 muted. 3 182. Looking forward, Deutsche Bank stated it foresaw even lower growth in Yahoo!’s 4 paid search versus the growth available in the market, attributing the effort to rid Yahoo!’s affiliate 5 network of poor traffic quality partners and Yahoo!’s inability, due to the lower quality of its traffic, 6 to keep more of the advertising revenue it was obtaining with higher quality partners:

7 Search Speed Bumps 8 * * *

9 While branded inventory experienced some weakness, our estimates have global paid search for Yahoo! growing at 16%Y/Y, lighter than our expectations of 10 26%Y/Y growth. It appears the affiliate business impact played a more significant role in addition to the click through rate declines. Recall the company stated that it 11 will start to focus on traffic quality and eliminate low-quality affiliates over time. 12 183. On October 2, 2006, Business Week’s Ben Elgin detailed Yahoo!’s dependence on 13 click fraud for revenues in a cover story which stated that online advertisers were being fleeced for 14 as much as $1 billion annually due to click fraud:

15 Click Fraud; The dark side of online advertising 16 * * *

17 The growing ranks of businesspeople worried about click fraud typically have no complaint about versions of their ads that appear on actual Google or Yahoo Web 18 pages, often next to search results. The trouble arises when the Internet giants boost their profits by recycling ads to millions of other sites, ranging from the familiar, 19 such as cnn.com, to dummy Web addresses like insurance 1 472.com , which display lists of ads and little if anything else. When somebody clicks on these recycled ads, 20 marketers such as MostChoice get billed, sometimes even if the clicks appear to come from Mongolia. Google or Yahoo then share the revenue with a daisy chain 21 of Web site hosts and operators. A penny or so even trickles down to the lowly clickers. That means Google and Yahoo at times passively profit from click fraud 22 and, in theory, have an incentive to tolerate it. So do smaller search engines and marketing networks that similarly recycle ads. 23 * * * 24 A BusinessWeek investigation has revealed a thriving click-fraud underground 25 populated by swarms of small-time players, making detection difficult. “Paid to read” rings with hundreds or thousands of members each, all of them pressing PC 26 mice over and over in living rooms and dens around the world. In some cases, “clickbot” software generates page hits automatically and anonymously. Participants 27 from Kentucky to China speak of making from $25 to several thousand dollars a month apiece, cash they wouldn’t receive if Google and Yahoo were as successful at 28 blocking fraud as they claim.

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1 “It’s not that much different from someone coming up and taking money out of your wallet,” says David Struck. He and his wife, Renee, both 35, say they 2 dabbled in click fraud last year, making more than $5,000 in four months. Employing a common scheme, the McGregor (Minn.) couple set up dummy Web 3 sites filled with nothing but recycled Google and Yahoo advertisements. Then they paid others small amounts to visit the sites, where it was understood they would 4 click away on the ads, says David Struck. It was “way too easy,” he adds. Gradually, he says, he and his wife began to realize they were cheating unwitting 5 advertisers, so they stopped. “Whatever Google and Yahoo are doing [to stop fraud], it’s not having much of an effect,” he says. 6 184. On November 20, 2006, the plaintiffs in the Drauker syndication fraud class action 7 filed a second amended complaint expressly alleging that Yahoo! had engaged in various syndication 8 fraud misconduct throughout the May 6, 2000-May 6, 2006 Class Period, including: 9 • That “[j]ust as traditional advertising costs more in some publications or 10 locations than others, so too do the prices of Internet advertising vary,” with the “market value of Internet ads [being] higher when the ads are shown to 11 users who are, for example, actively seeking certain products or actively 12 engaged in purchasing decisions for such products” and that “Yahoo specifically touts the quality of its sites and third party sites at which Yahoo 13 displays ads: Yahoo describes those third party sites as ‘popular [and] high- quality,’ specifically naming such distinguished partners as Microsoft, CNN, 14 and The Wall Street Journal”;

15 • That Yahoo!’s YPN “specifically provide[d] that Yahoo!’s Syndication 16 Partners must not show ads in pop-ups or pop-unders (advertising methods widely associated with spyware)” and that “Yahoo’s statements convey[ed] 17 that it [would] not use, nor pay Syndication Partners to use or provide, such unwanted and improper forms of advertising”; 18 • That nonetheless, “Yahoo ha[d] caused class members’ ads to appear in 19 spyware software programs,” specifically alleging that in “2005 and 2006, 20 New York Attorney General’s office investigations of spyware operators Intermix and Direct Revenue revealed that Yahoo ha[d] placed class 21 members’ ads into spyware provided by those companies” and that “[o]ther investigations ha[d] uncovered numerous other instances of Yahoo placing 22 class members’ ads into notorious and well-known spyware,” concluding that “Yahoo’s use of spyware is illegal” as Yahoo! had “caused class members’ 23 ads to appear in spyware-delivered windows without the labeling and 24 disclosures required by applicable regulations,” including 2002 spyware labeling requirements issued by the FTC; 25 • That as a result, Yahoo!’s Overture unit had improperly collected “premium” 26 rates for pay-for-performance advertising when the value of that advertising was diminished by Yahoo! placing the “ads within spyware programs, 27 typosquatting sites, and other untargeted sites . . . and other Internet back 28

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1 alleys . . . maintained by [Yahoo!’s] Syndication Partners where market prices are far less”; 2 • That “Yahoo and its partners pocket[ed] the difference, causing class 3 members to incur un-bargained for payments to Yahoo”; 4 • That “[t]he conspiracy Yahoo and its syndication partners perpetrated was 5 designed and implemented in order to maximize ad revenues at the expense of Yahoo’s advertising customers”; and 6 • That “Yahoo knowingly . . . manipulated that system for its own benefit, by 7 increasing the volume of improper advertising displays during financial 8 reporting periods when Yahoo was at risk of failing to meet investor expectations.” 9 185. The improper revenue recognition allegations in the Drauker syndication fraud 10 lawsuit were made by Harvard Business School professor Ben Edelman, an expert on online 11 advertising billing practices, who was also a lawyer representing plaintiffs in that action. Edelman 12 based his allegations that “Yahoo knowingly . . . increas[ed] the volume of improper advertising 13 displays during financial reporting periods when Yahoo was at risk of failing to meet investor 14 expectations” on data obtained in his laboratories during the Class Period, his review of media 15 accounts and Yahoo!’s and its affiliates SEC filings, and discussions with his own confidential 16 witnesses. In support of his claims, Professor Edelman cited provisions in Yahoo!’s contract with 17 advertisers and from its Market Place Rules where Yahoo! “represent[ed] to its advertising 18 customers that its ads [were] only shown to users who [had] shown interest in corresponding 19 products or services,” that “Yahoo promise[d] that advertisers’ ads w[ould] be ‘highly targeted’ to 20 such users,” and that Yahoo! promised “that Sponsored Search advertising displays ads at search 21 engines, to reach ‘search users’ who are actively engaged in searching the web; and that ‘Content 22 Match’ advertising displays ads at content sites, showing ads ‘along with relevant articles, product 23 reviews, and more.’” Professor Edelman also expressly alleged that Yahoo! “represented that 24 advertisement displays [would] be ‘highly targeted,’” that “ads would be shown to users ‘searching 25 for what you sell,’” that “‘a listing for your business will appear when Internet users enter searches 26 related to your keywords,’” that “‘relevant listings are displayed to internet users,’” and that Yahoo! 27 28

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1 “thereby promised only to show class members’ ads when the ads are actually relevant to users’ 2 interests, as revealed through users’ search terms or web browsing.”

3 186. During the Company’s January 23, 2007 1Q 07 earnings conference call, Decker 4 conceded that “[f]or the full year of 2007, we expect revenue, ex-TAC, to range from $4.950 billion 5 to $5.540 billion, up about 14% from year ago levels at the mid-point. Importantly, inherent in the 6 forecast our core O&O business across search and display is expected to grow close to 20% in ‘07, 7 very similar to the growth trends we realized in ‘06. It is the traffic quality investments and rising

8 TAC that cause downward pressure on the affiliate business in the near term . . . . We expect our 9 core O&O margins to continue to rise in ‘07 as they did in ‘06, helping to offset the near-term 10 impact of the traffic quality and TAC issues, which we believe will create a 200 basis point 11 headwind to 2007 margins.” Discussing what Yahoo!’s “business outlook incorporate[d],” Semel

12 too confirmed that:

13 In terms of quality improvements . . . it’s fair to say that we see the underlying need of our advertisers is to drive very valuable leads. That’s a major 14 source of our . . . business. We have taken a number of steps to make sure that that happens, and we mentioned – actually last year – a number of steps we had taken 15 with respect to traffic quality to address lower performing affiliates . . . . Now more automated, in the first release of Panama, we are providing advertisers with controls 16 that help them manage both intracountry leads and international traffic sources. 17 187. The plaintiff in the Drauker syndication fraud action filed in May 2006, along with a 18 number of other Yahoo! advertising customers, had objected to the settlement of the Checkmate 19 click fraud class action preliminarily approved on June 28, 2006. On March 6, 2007 Yahoo!’s

20 counsel participated in a 13 hour mediation of these objections. The Druaker plaintiff and the other 21 objectors argued the release was too broad to the extent that it attempted to release the Drauker 22 syndication fraud claims, and the mediation resulted in the advertisers’ syndication fraud claims

23 being carved out of the Checkmate settlement release, i.e. all claims relating to ad revenue charged 24 by Yahoo! by virtue of (a) spyware and adware; (b) typosquatting, domain name parking and bulk 25 registration websites; and (c) generally untargeted placements. That which is considered “click 26 fraud,” and thus released in connection with the Checkmate settlement is: “click through fraud, 27 fraudulent clicks, click spam, invalid clicks, unqualified clicks, clicks where the user did not actively 28 choose the Class Persons’ listings, automated clicks, clicks generated by robots, clicks generated by

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1 Persons who did not have a bona fide interest in viewing the contents of a Yahoo! ad, clicks that 2 were deceptive malicious or executed in bad faith, clicks that were not generated in good faith, and 3 clicks made in bad faith with the sole purpose of generating a charge.” A modified stipulation of 4 settlement is filed in the Checkmate click fraud class action. The modification of the Checkmate 5 click fraud class action also required that Yahoo! rerun the Checkmate advertisers’ data through the 6 Yahoo!’s click fraud detection system in place as of June 30, 2006 to determine if credits/refunds are

7 due advertisers under the Checkmate settlement. 2

8 188. As part of its settlement of the Checkmate click fraud lawsuit in June 2006, Yahoo! 9 had also agreed to appoint a click fraud czar. In announcing the appointment of Reggie Davis, 10 Yahoo!’s former in-house counsel tasked with defending the Checkmate click fraud and Drauker 11 syndication fraud lawsuits, to the position on March 22, 2007. Yahoo! also announced that it would 12 no longer bill advertisers 12%-15% of the clicks on its ads. Commenting on Yahoo!’s

13 announcement, Bloomberg reported that “Yahoo’s policy is an attempt to address ‘click fraud,’ the 14 practice of clicking on ads to drive up advertisers’ bills or generate sales for other websites,” noting

15 that Yahoo! “said it will introduce more products this year to improve the quality of the sales leads 16 its ads generate.”

17 189. During the Company’s 1Q 07 earnings conference call on April 17, 2007, Decker was 18 specifically questioned about her “commentary about off network partners,” noting that she had 19 “commented on traffic quality initiatives,” and asking her to “give . . . a little bit more details there?

20 What kind of opt-out will be allowed there . . . will advertisers be allowed to opt out of the Yahoo! 21 publishing network . . . and is there something specific to the domain channel as well?,” to which

22 Decker responded:

23 We have a number of initiatives that we are likely to introduce as the year goes on. I’d say that in the first introduction of Panama, we already offered geographic opt 24

25 2 Yahoo!’s John Slade submitted a declaration responding to objections to the Checkmate click 26 fraud class action settlement where he concedes on behalf of Yahoo! that during the period covered by the securities fraud class action, Yahoo! added 200 additional click fraud filters, purportedly 27 significantly improving its click fraud filtering system by January 2007. Slade admits these filters were not in place during the 4/04-7/06 Class Period relevant to this action. 28

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1 out, which is different than what we had before. In subsequent releases, we’ll be moving towards giving advertisers greater control, including quality-based pricing 2 and domain blocking.

3 190. Thereafter, commenting on Yahoo!’s 1Q 07 results, on April 18, 2007, Jeetil Patel at 4 Deutsche Bank again blamed ridding the Yahoo! affiliate network of poor traffic quality partners 5 with “dragging” down Yahoo!’s earnings:

6 Affiliate network still dragging on growth 7 We estimate Affiliate revenues declined 17% Y/Y in 4Q-07 (or -9% excluding MSN), worse than our anticipated 6% Y/Y decline. Despite the launch of 8 Panama, we believe this segment will continue to act as a headwind and are forecasting just 4% Y/Y growth in 2007 (the growth rate for the remainder of the 9 year is high at 12%). Rising TAC rates (Yahoo!’s rates are ~75% whereas industry deals today are being struck at 85%) and a clean-up of its low quality traffic partners 10 are combining to reduce affiliate revenues. Recall too that Panama enables advertisers to opt-out of individual affiliate sites - hence whilst overall traffic quality 11 may improve, in the near-term we think Yahoo!’s overall affiliate network could lose further ad budget share. Note that third-party affiliates are seeing zero monetization 12 on international traffic on a domestic site, thereby resulting in lower revs for the affiliate and Yahoo! 13 191. On June 4, 2007, Yahoo! was forced yet again to announce “A New Pricing Model 14 Rolls Out Today - Your Click Charges to be Based on Quality of Traffic.” The release detailed a 15 new pricing policy for Yahoo! online advertising which would penalize YPN affiliates who 16 attempted to profit from low-quality traffic, traffic Yahoo! candidly conceded had been billed at full 17 rate in the past: 18 Yahoo! Search Marketing is rolling out a new feature that we think will help enhance 19 the quality, potentially reduce the cost and increase the value of traffic to you, our advertisers. It’s called quality-based pricing, and it measures the quality of traffic 20 coming from our distribution partners - that is, the web publishers large and small that display your ads. 21 Previously, you were charged the same for traffic from all web sites within our 22 distribution network. Now, with quality-based pricing, you may be charged less for certain clicks than you otherwise would pay, depending on the overall quality of the 23 traffic provided by our distribution partners. As a result, your click charges can decrease. 24 “Quality” is calculated based on conversion rates and other measurements of the 25 ability of our partners’ sites to deliver more interested, valuable customers to you. 26 What do you need to do? Nothing that you aren’t already doing now. With quality- based pricing, the system does all the work. Your click charges may be discounted 27 based on the quality of traffic you receive. Please note that some may experience a noticeable decrease in overall cost-per-click. . . . 28

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1 192. On April 21, 2008, U.S. District Court Judge Christina Snyder denied Yahoo!’s

2 motion to dismiss the Drauker syndication fraud class action, specifically holding that:

3 Defendants argue that plaintiffs’ breach of contract claim must be dismissed because the express terms of the Agreement indicate that defendants never promised that 4 plaintiffs would receive targeted advertisement placement. 5 * * * 6 Defendants further argue that the Agreement does not state that defendants will not place plaintiffs’ advertisements in spyware, typosquatting sites, or other such 7 undesirable sites. Additionally, defendants argue that while the Agreement provides that plaintiffs’ advertisements “may be distributed through the Yahoo! Search 8 Marketing Distribution Network based upon certain user targeting initiatives,” defendants do not promise in the Agreement to use such targeting initiatives, as 9 opposed to random placement . . . . 10 Plaintiffs respond that, notwithstanding the foregoing provisions, the Agreement’s references to “Sponsored Search” and “Content Match” products, 11 which, according to plaintiffs, are not defined in the Agreement, indicate that defendants promised to “target” plaintiffs’ advertisements. Plaintiffs argue that 12 defendants represented in their sales and marketing materials that, by purchasing these products, plaintiffs would receive “highly targeted” advertising services. 13 Plaintiffs further argue that to the extent defendants charged plaintiffs for advertising services other than “Sponsored Search” and “Content Match” services – i.e., to the 14 extent that defendants charged plaintiffs for untargeted advertising services – defendants breached their contractual obligations. 15 Denying Yahoo!’s motion to dismiss the Drauker plaintiffs’ “Misrepresentation” claims, Judge 16 Snyder expressly rejected defendants’ claim that Yahoo! did not promise “targeted advertising” 17 during the Class Period, noting that “[p]laintiffs allege that defendants falsely represented that by 18 purchasing defendants’ ‘Sponsored Search’ and ‘Content Match’ products, plaintiffs’ advertisement 19 displays would be ‘highly targeted.” 20 CONFIDENTIAL SOURCES 21 193. The allegations of falsity and actual knowledge pled herein are made on information 22 and belief and are supported by the first-hand accounts of 17 confidential witnesses (“CW”), 23 including former Yahoo! employees and customers. Confidential witnesses have been identified 24 with as much particularity as possible without disclosing their identities. Plaintiffs are informed and 25 believe that disclosing the witnesses’ identities publicly, and/or to defendants, could result in serious 26 injury to the witnesses or their careers. The confidential witnesses are as follows: 27 28

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1 194. Confidential Witness #1 (“CW1 ”) was employed by Yahoo! for 10 years in a variety 2 of engineering roles, including Vice President of Engineering throughout the Class Period. In

3 October 2005, CW1 was assigned to lead Panama. According to CW1, Panama was a necessity for 4 Yahoo! to compete with Google. When s/he was assigned to lead Panama, the project had already 5 been started three different times, and had failed twice. The first attempt was to “revamp” the legacy 6 Overture advertising system and not much more which was initiated in 2003 or 2004, and which 7 failed. The second attempt was under Executive Vice President of Engineering, Phu Hoang. It was 8 originally intended to deliver a new “test” advertising system in Australia, which was a smaller 9 market than the United States. It was limited to Australia in order to limit the risks of a large scale 10 launch, but this attempt failed “miserably” and resulted in Hoang’s removal from Panama in July or

11 August 2005 by defendant Nazem. After that, according to CW1, Vice President of Engineering 12 David Hanke sat Nazem down and told him “we need more resources.” Because of ongoing delays 13 to the project, Yahoo! ultimately had to launch Panama directly to the U.S. The third and final 14 attempt was the re-initiation of Panama under CW1 and Senior Vice President of Product 15 Management, Mark Morrissey. According to CW1, until at least October 2005, Panama suffered 16 from “a lack of executive buy-in” meaning that Panama was not made a priority. Panama was more 17 about integrating Yahoo! and Overture, which included culture clashes among the executives 18 assigned to the project and Overture. In early 2005, many individuals who had critical roles in 19 Panama departed Yahoo!, often after internal disagreements regarding Panama. Thus, CW1 was

20 under a lot of pressure to “get it out there immediately” when s/he was assigned to lead Panama. 21 This pressure came verbally from defendant Nazem and Executive Vice President Jeff Weiner, who 22 each reported directly to defendant Semel. Both Nazem and Weiner knew the urgency of 23 completing and launching Panama when CW1 joined the project in October of 2005. The launch of 24 Panama was critical because with any delay, Yahoo! risked “missing its commitments to Wall 25 Street” due to the expected increase in revenues that would result from the completion of Panama.

26 (a) CW1 was one of the additional resources Yahoo! assigned to Panama in the 27 second half of 2005, after defendant Nazem and other Yahoo! corporate staff finally made Panama a 28 high priority. According to CW1, when s/he was assigned to Panama in October 2005, that project

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1 was slated for a 2Q 06 launch, which was not a feasible launch date because it entailed moving the 2 Overture and Yahoo! systems onto one platform by March 2006. Therefore, in December 2005, 3 CW 1 created a new schedule with a launch date of August 2006. As of December 2005, the design 4 of Panama software had progressed, but none of the code had been written. CW1 and Morrissey 5 updated Nazem once a week on Panama’s progress during Wednesday meetings in Burbank. CW 1 6 knows that defendant Nazem met on a weekly basis with defendants Semel, Decker and Rosensweig 7 in Sunnyvale, and stated that defendant Nazem provided updates on Panama in those meetings with 8 the other defendants. Defendant Nazem regularly said that Panama was the “number one priority” 9 for Yahoo!. Every day, CW1 assigned a “confidence number” to the likelihood of meeting the

10 August 2006 launch date. By April 2006, the schedule for Panama slipped again and CW1 told 11 Nazem that the August 2006 launch was not going to happen and Nazem, in turn, shared that 12 information in his weekly Sunnyvale meetings with defendants Semel, Decker and Rosensweig.

13 Also, according to CW1, the August 2006 date slipped because, between October 2005 and April 14 2006, Yahoo! “lost” about four weeks to internal arguments/disagreements among the team, another 15 four weeks due to hardware readiness issues, and another two weeks due to integration testing issues.

16 195. Confidential Witness #2 (“CW2”) began working for Overture’s predecessor, 17 GoTo.com in September 1999, and became an Overture employee following Overture’s acquisition 18 of GoTo.com. Following Yahoo!’s acquisition of Overture, CW2 became an Inside Sales Manager 19 with Yahoo! and remained in that role until June 2007. Working out of the Pasadena facility, CW2

20 managed a group that serviced new search customers, educating them about Yahoo! /Overture search 21 products and assisting them in building advertising campaigns. According to CW2, Nazem made a

22 visit to the Pasadena facility around March 2006 to meet with sales managers, including CW2. 23 During that meeting, Nazem confirmed that Yahoo! had committed extraordinary resources to 24 Panama in order to meet the scheduled 3Q 06 launch date. CW2 also confirmed that Panama was 25 delayed because the back-end was still not ready, as s/he was informed of the delay by his/her 26 manager.

27 196. Confidential Witness #3 (“CW3”) worked as an Engineering Manager at Overture 28 beginning in approximately April 2002. When Yahoo! acquired Overture in October 2003, CW3

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1 worked for Yahoo! in the Business Information Systems group at the legacy Overture facility in 2 Pasadena until approximately October 2004. The Business Information Systems group at Yahoo! 3 was responsible for programming and data reporting related to: (1) billing systems; (2) a click fraud 4 detection system; and (3) a search servicing system. These systems supported Yahoo!’s Sponsored 5 Search, Content Match, Domain Match, and Yahoo!’s local match product. While employed at 6 Yahoo!, CW3 led the click fraud detection system. Yahoo! defined click fraud in four ways, with 7 the four classifications having already been defined when CW3 joined Overture in 2002.

8 (a) The first category of click fraud was perpetrated by advertisers’ competitors. 9 Yahoo!’s search advertisement product ran as a “real time auction” so that its advertising customers 10 bid a certain amount of money per click for specific search terms. The customer’s ranking in the

11 search results was based upon the amount of money it bid for a specific search term. Yahoo!’s 12 advertising customers’ competitors, which were often Yahoo! customers themselves, would 13 purposefully click on another company’s ad in an effort to deplete the funds that customer had 14 allotted for advertising at Yahoo!. A competitor’s ranking in the search results would be higher if

15 that company’s advertising budget was depleted.

16 (b) The second type of click fraud was perpetrated by Yahoo! affiliates, which 17 were publishers and advertising partners with which Yahoo! shared advertising revenues. For each 18 click an advertiser paid for, part of the revenue went to Yahoo! and part went to the affiliate. 19 According to CW3, Yahoo! had a network of at least several hundred website and/or online

20 affiliates, some of which received as much as a 70% revenue share for displaying the ads of 21 Yahoo!’s customers on their own websites. CW3 stated these affiliates were often publishers of blog 22 sites and other small publishers. Affiliates who had revenue share agreements with Yahoo! had a 23 motive to perpetrate click fraud because it could bolster their own revenues, while Yahoo! benefited 24 from increased revenues as well.

25 (c) The third type of click fraud was defined as clicks on Yahoo! customers’ 26 advertisements by “delusional” Yahoo! shareholders who believed they might increase Yahoo!’s 27 revenues and thereby the value of their investment in the Company by clicking on the ad. CW3 did 28 not recall any of this type of click fraud occurring while he was at Overture or Yahoo!. The fourth

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1 type of click fraud was the “theoretical abuser,” defined by Yahoo! as a user who was angry with 2 spammers and wanted to get even with them by inappropriately and repeatedly clicking on their 3 advertisements.

4 (d) CW3 learned from Yahoo!’s Loss Prevention Manager while working at 5 Yahoo! that the Company decided in late 2004 to “relax” the business rules and filters in the click 6 fraud detection system for Yahoo!’s advertising partners, in particular Yahoo!’s Content Match

7 partners, also known as “contextual ad partners.” The Business Information Systems group was 8 aimed at optimizing the performance of systems and increasing their efficiency since Yahoo!’s

9 acquisition of Overture in October 2003. The click fraud detection system was regularly 10 programmed with new business rules and system filters aimed at weeding out clicks that were 11 illegitimate and for which customers should not have been billed. These changing system filters 12 tracked clicks and determined how many clicks during a given time period (typically in 15 minute 13 and one-hour intervals) would be considered excessive and thus would be eliminated as “non- 14 billable.” The relaxation of the click fraud rules allowed Yahoo! to generate additional revenues by 15 allowing for the counting of additional improper clicks on the Content Match partner sites. 16 According to CW3, changes to the business rules were simple modifications to the coded 17 instructions that determined how many clicks were deemed non-billable. The business rules and 18 system filters interfaced with the billing system at Yahoo!.

19 (e) Yahoo!’s Content Match partners consisted of essentially anyone who had a 20 blog site or website and sought to display the ads of Yahoo!’s advertising customers as a means of 21 generating revenue. The Content Match partners were essentially “self sign-up” partners and

22 virtually anyone who sought to be one of Yahoo!’s Content Match partners was given that status. 23 Yahoo! would provide the Content Match partner the language to be used for the advertisement and 24 the partner would begin generating revenue, to the extent anyone clicked on the ad when it appeared 25 next to an article on the contextual advertiser’s site, and the affiliate would pay part of the revenue to 26 Yahoo! in exchange for displaying Yahoo!’s customers’ ads. In contrast, Yahoo!’s Search

27 Advertising Group conducted at least some due diligence with regard to search ad partners and 28 typically interacted with such partners in contract negotiations. According to CW3, the partners

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1 whose quality Yahoo! had not investigated or screened were more willing to engage in or allow click 2 fraud on their sites because they had less to lose than the more established and reputable search ad 3 partners, and thus their own revenues from Yahoo! would be bolstered. 4 (f) The decision to relax the business rules controlling whether clicks were 5 billable upset many of the legacy Overture personnel because it resulted in inappropriate revenue 6 being generated by Yahoo! (and shared with low quality affiliates) and because the customers were 7 not satisfied with contextual ad traffic due to its low conversion rate. According to CW3, customers 8 did not have the choice to opt out of Content Match. CW3 estimates revenues generated from the 9 relaxation in business rules represented approximately 25% of Overture’s operating revenues.

10 (g) Before CW3’s departure from Yahoo!, while working with the systems 11 supporting Sponsored Search, CW3 understood Panama was supposed to improve 12 Yahoo!/Overture’s bid system and search advertising platform so that Yahoo! could compete with 13 Google, who was outpacing Yahoo!’s revenue per search. As such, while Yahoo! was ranking 14 search results based on an advertiser’s bid on a key word, Panama was intended to rank paid search 15 results based on a combination of the advertiser’s bid on a search term as well as the click through 16 rate.

17 197. Confidential Witness #4 (“CW4”) is a former Product Manager at Yahoo! employed 18 from February 2003 to March 2006 and was involved in working on Panama. CW4 was aware that 19 Panama was originally scheduled to be launched in 2005, but as of the fall of 2005, little progress

20 had been made toward its completion. CW4 stated Panama was “going nowhere” until the Company 21 devoted much larger resources to the project and the Company’s headquarters took over its 22 development in the fall of 2005. CW4 confirmed that by February 2006, the Company had yet to 23 achieve important milestones for back-end components necessary to complete Panama. At the 24 Overture Pasadena location, Panama was plagued by personnel turnover as CW4 him/herself 25 described that s/he had seven managers in the 18 months prior to Panama being transferred to the 26 Company’s Sunnyvale office in October 2005. By the time s/he departed Yahoo!, CW4 believed 27 that a 3Q 06 Panama rollout was not feasible. CW4 believed that the advertiser’s desire to have the 28 product released during 3Q 06 so that necessary training could be completed prior to the busy

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1 holiday season in 4Q 06 caused Yahoo! managers to commit to, and announce, a rollout date that 2 was not feasible. CW4 also confirmed that Panama was run out of defendant Nazem’s office in 3 Sunnyvale after it was transferred there in October 2005. 4 198. Confidential Witness #5 (“CW5”) worked at Yahoo! from August 2003 to June 2004 5 as a Senior Credit Analyst at the corporate headquarters in Sunnyvale. In that role, CW5 was 6 responsible for working with Yahoo! customers that advertise on Yahoo!’s various websites with 7 both banner and pay-per-click advertisements. CW5 was responsible for reviewing and approving 8 credit applications for advertising customers that intended to advertise on Yahoo!’s websites. In the 9 performance of his/her duties, s/he also accessed and reviewed invoices on Yahoo!’s Oracle 10 accounting system. Most of Yahoo!’s advertising customers were billed on an invoice basis. 11 According to CW5, there was one “major issue” with the invoice system in that Yahoo! was unable 12 to bill customers based on the actual number of clicks and instead billed customers based on an 13 estimated number of clicks. This major issue was the subject of customer complaints. During 14 CW5’s training for this position, s/he was informed of this problem and was instructed to inform 15 customers that there was a “limitation in the system” and that Yahoo! was working towards 16 upgrading the system so that customer invoices would reflect the actual, and not estimated, number 17 of clicks. However, those promised upgrades had not been completed by the time CW5 left Yahoo! 18 in June 2004. During CW5’s training in August 2003 to become a Senior Credit Analyst, CW5 was 19 informed s/he would receive phone calls from Yahoo! advertising customers inquiring as to why

20 they were being billed based on an estimated number of clicks rather than an actual number of clicks 21 that occurred on their advertisements. Customers had access to a system whereby they were able to 22 monitor the click activity on their accounts, and thus were able to ascertain the charges for clicks on 23 their advertising bills from Yahoo! that were in excess of the actual clicks that customers saw on 24 their accounts during a given billing cycle. During his/her tenure at Yahoo!, CW5 was aware that 25 the Company received customer complaints regarding Yahoo!’s inability to invoice customers based 26 on actual numbers of clicks at least once or twice per day. CW5 worked directly for, and had regular 27 discussions with, a Global Credit and Collections Manager, who was aware, based on these 28 discussions, of the substance of these customer complaints. CW5 also knew based upon shared

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1 calendars and instant messaging that this Manager regularly met with defendant Decker during 2 CW5’s tenure at Yahoo!.

3 199. Confidential Witness #6 (“CW6”) was employed by Yahoo! from November 2003 4 through February 2007. S/he first worked for Overture and then for Yahoo! as a sales representative 5 in its 25-person “Platinum Sales Group”(advertisers that bought $100,000 to $150,000 of ads per 6 month). CW6 had regular communication with customers who complained about click fraud with 7 the nature of the complaints consistent – customers complained about poor sales results while 8 experiencing large volumes of clicks which were depleting their ad budgets. CW6’s fellow sales 9 representatives had the same experiences with customers. The main cause of complaints was “bad 10 mapping technology,” which resulted in customer ads appearing in results of non-relevant search

11 terms, particularly in the Content Match area. There was no set formula or standard to determine 12 customer refunds and the main focus was on minimizing customer repayments. At Overture there 13 were not a lot of issues with customer complaints, but after Yahoo! took over and Content Match 14 was introduced, complaints began to escalate. CW6 confirmed that 15% of the revenue generated in 15 his/her group was created via click fraud and irrelevant clicks from the poor quality Content Match 16 program. 17 200. Confidential Witness #7 (“CW7”) is a former International Sales Specialist at 18 Yahoo!’s Overture facility in Pasadena from December 2004 to February 2006. CW7 has 19 knowledge of the project to put all of Overture’s back-end functions on a single platform, internally

20 know as “solving the blob,” that was a necessary precursor to Panama. As of 4Q 05, the “solving the 21 blob” project was delayed and was not even complete in February 2006 when s/he left the Company. 22 Originally, “solving the blob” was scheduled to be completed in 3Q or 4Q 05. CW7 confirmed that 23 this integration project was a necessary step before Panama could be completed because that project 24 depended on the integration of Yahoo!’s Search Marketing back-end business information systems. 25 Because of the delay in “solving the blob,” Panama was also delayed when CW7 left Yahoo!. 26 201. Confidential Witness #8 (“CW8”) was hired as an engineer by Overture prior to the 27 start of the Class Period and became a Yahoo! engineer when the Company acquired Overture in 28 2003. CW8 worked as a Yahoo! engineer throughout the entire Class Period. During the Class

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1 Period, CW8 worked on Yahoo!’s search monetization products, including Content Match and 2 worked on the building of Panama. As an engineer who worked on Yahoo!’s monetization products,

3 CW8 was aware of how click fraud was perpetrated through Content Match. In summer 2005, 4 Yahoo! formed an Operating Committee to oversee and manage Panama. The Operating Committee 5 was comprised of the leaders of the functional teams that worked together to build Panama. CW8 6 was an integral member of the Operating Committee from its inception to the end of 2006 when the 7 Committee was disbanded. Prior to the formation of the Operating Committee, CW8 provided input 8 on the architectural approach to Panama’s development. As an integral member of the Operating 9 Committee, CW8 was aware of the internal schedule for completing Panama, the communications to 10 the Individual Defendants regarding the schedule for Panama’s completion and the delays in rolling

11 out Panama during the Class Period. 12 (a) According to CW8, following Yahoo!’s acquisition of Overture in 2003, the 13 click traffic from Content Match increased exponentially and there was a higher incidence of 14 irrelevant ads appearing next to Content Match search results. CW8 described Content Match as 15 being rushed to the market, and was a lower quality product that had operating problems from its 16 inception in 2003 and throughout the Class Period. According to CW8, Content Match performed 17 poorly in analyzing text for the purpose of matching content to search terms and often identified 18 terms that did not properly reflect the content, which caused irrelevant ads to be placed next to 19 results of contextual searches. According to CW8, Yahoo!’s advertising customers were

20 automatically enrolled in Content Match during the Class Period and were billed the same price for 21 the poor quality clicks coming from Content Match searches as those generated from Sponsored 22 Search keyword searches. Content Match produced low quality traffic because, first, users doing 23 performing were not doing so with the intention of purchasing anything, whereas users doing

24 searches utilizing Sponsored Search generally had a greater degree of intent to buy something. 25 When contextual searchers did click in ads appearing next to articles on a given site, those clicks 26 were more random than a click on a Sponsored Search result, for example because the user thought 27 there was something in the ad relevant to the content being viewed or, for example, the user was just 28 “browsing” when he or she clicked on the ad. These were clicks that occurred “without intent to

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1 buy,” and were considered low quality. Second, the more irrelevant an advertisement was that 2 appeared next to a site’s content, the less likely any click traffic would produce sales. Also, CW8 3 was aware of the irrelevant placement of the Content Match advertisements creating “click 4 tsunamis,” and was aware poor quality clicks resulting from poor placement, which completely

5 depleted a small customer’s advertising budget. CW8 stated that during 2004, there were complaints 6 from advertisers because Content Match increased costs due to the product’s poor quality traffic. 7 According to CW8, in 2004 Yahoo! was forced to begin addressing the problems with Content 8 Match and issuing refunds to certain customers who complained. CW8 also stated the quality of 9 traffic from Domain Match was known by Yahoo! to be very poor in comparison to Sponsored 10 Search, however customers were not told about the republishing of their ads on low quality domain 11 affiliates, and also were unable to “opt out” of Domain Match throughout the Class Period. Domain 12 Match according to CW8, was not contained in the contract terms between Yahoo! and its 13 advertising customers. According to CW8, the Individual Defendants regularly received reports 14 detailing performance issues associated with Content Match and Domain Match from the senior 15 managers that addressed the every day issues with these two paid search products, including Tim 16 Cadogan, Jeff Weiner, Ted Meisel, and Bill Demas.

17 (b) The poor quality of clicks from Yahoo!’s Domain Match partners increased 18 dramatically after Yahoo! created the Yahoo Publisher Network in August 2005 to aggressively 19 pursue revenue sharing agreements with domain affiliates or aggregators, including bloggers. CW8

20 stated this was an easy way to increase revenue, without having to “break [it] out” when reporting 21 paid search results to Wall Street. The creation of YPN in the summer of 2005 was an attempt by 22 Yahoo! senior management to compete with Google, which was continuing to take over search 23 market shares, given that Yahoo!’s existing search products could not perform well enough to be 24 competitive while Panama was being delayed. Because Yahoo! did not fully contemplate many 25 technical issues, of which defendants were aware before releasing YPN, the launch in August 2005 26 was called the YPN “beta version” so that Yahoo! could essentially disown responsibility for any 27 problems that occurred. Particularly, defendants Nazem and Rosensweig anticipated the large 28 increase in the volumes of partners and traffic. CW8 attended several meetings with defendant

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1 Nazem, Phu Hoang and the management at the Legacy Overture facility in Pasadena, at which 2 Yahoo!’s strategy to gain increased revenue by partnering with low quality domain affiliates that 3 attracted large volumes of “questionable traffic” was discussed. CW8 confirmed defendants Nazem, 4 Semel and Decker were well aware of this part of Yahoo!’s business strategy. According to CW8, 5 the Panama Steering Committee, met with Yahoo! executives and, in addition to issues and problems 6 related to Panama, discussed the issues of click fraud and the poor quality of traffic provided by low 7 quality affiliates as a huge source of revenue derived from bad traffic.

8 (c) According to CW8, in approximately summer of 2005 and in response to 9 customer complaints, Yahoo! created the CAR Team to handle complaints about bad traffic and 10 click fraud. CW8 stated Yahoo!’s policy from defendant Decker down was that no one at the 11 Company would tell any customer the basis for determining the amounts refunded in response to 12 complaints over billing. CW8 stated that in early 2005 the business rules governing the standards for 13 when to discard a click as fraudulent or non-billable were changed or abandoned due to high 14 incidence of refunds, with the stated internal reason that the system was not working. CW8 15 confirmed this was a decision Yahoo! management “had to know would result in even larger 16 numbers of irrelevant clicks and therefore more revenue for Yahoo!.” CW8 stated Yahoo! 17 management “never treated [click fraud] like a big problem.”

18 (d) In early 2006, CW8 worked with other Yahoo! employees to prepare 19 presentations to management about the issue of traffic quality within the three search product lines –

20 Content Match, Domain Match and Sponsored Search. These presentations were made to Hoang 21 and defendant Nazem, among other engineers and product managers, and defendant Nazem regularly 22 and accurately briefed defendant Semel about these issues.

23 (e) CW8 confirmed the Individual Defendants were aware of click fraud and the 24 bad traffic caused by partnering with low quality affiliates. CW8 stated defendant Semel did not 25 personally deal with any technical matters, but was nonetheless regularly and accurately briefed by 26 Jeff Weiner and defendants Nazem and Rosensweig. Rosensweig had close contact with the sales 27 and product management at the Legacy Overture facility in Pasadena about the degree of click fraud, 28 customer complaints and the poor quality of partners being added to YPN in order to meet revenue

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1 demands. During meetings CW8 attended with Yahoo! management from 2003 throughout the 2 Class Period, s/he heard managers in charge of click fraud issues consistently state that it was better 3 to not know the exact percentage of clicks that should be non-billable and the associated revenue that 4 should have been refunded, even though click fraud was a growing issue.

5 (f) CW8 confirmed that during 2005 and 2006, Yahoo! did not have the best 6 search technology and did not offer the best search capabilities to advertising customers in the 7 industry. To the contrary, Google was clearly superior in these areas, Yahoo!’s customer base was 8 largely dissatisfied with Content Match, and there were increasing complaints regarding bad traffic 9 and low quality partners.

10 (g) According to CW8, defendants Semel and Decker knew about internal 11 statistics used by Yahoo! to track the quality of traffic from both Content Match and Domain Match 12 that showed the quality from both products was poor, and despite this knowledge, Semel and Decker 13 were counting on increasing Yahoo!’s revenues from these products as revenues from Sponsored 14 Search were decreasing.

15 (h) According to CW8, from mid-2004 to mid-2005, Panama languished due to 16 conflicts between Yahoo! and Overture executives, unrealistic timelines and insufficient staffing. 17 By summer 2005, two attempts were made at starting Panama, but each attempt failed miserably 18 resulting in no progress on Panama’s development. At this same time, Google was rapidly taking 19 market share in the Sponsored Search business and upgrading Overture’s system was becoming

20 critical for Yahoo!. CW8 confirms that the re-engineering of the Overture platform (Panama) was a 21 complex and enormous task and one of the most important projects at Yahoo!. In July 2005 22 defendants made a third attempt at getting Panama up and running. According to CW8, at this point, 23 a Panama Operating Committee was formed to run the day-to-day operations of the project. The 24 Operating Committee was comprised of leaders of the various functional teams that worked directly 25 on Panama which included engineering management, architecture, applied engineering, serving

26 engineering, offers engineering, advertiser experience and program management. CW8 was part of 27 the Committee. CW8 confirms that the goal of Panama was to create a system like Google’s where 28 an advertisers’ keyword purchases were based on the bid price multiplied by the CTR for the

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1 advertisement. According to CW8, the CTR measures the effectiveness of the advertisement by 2 measuring how often a user clicks on an ad when it is shown. CW8 confirms that the other 3 important goal of Panama was to revamp the user interface so that it was easier and better for 4 customers to use. 5 (i) CW8 confirms that by September 2005, the Operating Committee came to the 6 decision that Panama would involve a re-write of all systems, completely new from front to back- 7 end. CW8 states that in October 2005, Semel and Decker authorized Nazem to put all needed 8 resources to the project. Over the next three months, Nazem and Panama’s chief engineer 9 committed 300 engineers to the project. According to CW8, a Steering Committee was formed 10 shortly thereafter to oversee the Operating Committee. CW8 states that defendant Nazem was a 11 member of the Steering Committee and received weekly, sometimes daily, updates from the 12 Operating Committee on the status of Panama. CW8 confirms that the Steering Committee, 13 including Nazem, communicated directly with Semel, Decker, and Rosensweig, who were members 14 of the Executive Sponsorship Committee, on at least a bi-weekly basis about the status of Panama 15 and on the updates the Steering Committee received from the Operating Committee. According to 16 CW8, Panama had executive oversight because the project was so important to Yahoo!. CW8 also 17 states that Decker, as Yahoo!’s CFO, was an integral part of Panama’s management team and had 18 regular contact with the Operating Committee, as she was the person who authorized the resources 19 for the project.

20 (j) CW8 confirms that various steps were involved in developing Panama, 21 including assembling the resources for the project, designing, writing and testing the massive code 22 and then migrating Yahoo!’s 500,000 existing customers over to the new Panama platform. 23 According to CW8, by October 2005, defendants were pushing to complete Panama by April 2006, 24 however, CW8 stated that this was an impossible schedule. CW8 states that the April 2006 25 completion date was conceived in August 2005 when defendant Nazem was making unrealistic 26 demands that the Panama platform be completed in nine months or less. Defendants were under 27 pressure to get Panama up and running because Google was taking market share from Yahoo! and 28 because defendants knew that they would not be able to sustain the bogus revenue that was coming

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1 in from it other search products because of escalating customer complaints. According to CW8, this 2 schedule was unrealistic as the engineers had not yet assessed the full requirements for Panama so as 3 to be able to create a realistic schedule. 4 (k) CW8 confirms that in fall of 2005 the Panama engineers told Nazem that the 5 new platform could not be completed by April 2006 because the project was too complicated and 6 big. CW8 states that once the engineers were assigned to their various rolls and realistically assessed 7 the work that had to be done, the engineers again confirmed with Nazem that a 2Q 06 completion 8 date was impossible. However, according to CW8, David Ku, part of the Panama management 9 team, kept pressuring the engineers for an April 2006 completion date and imposing unrealistic 10 schedules on the engineers at defendant Nazem’s directive. In December 2005 the Operating 11 Committee reported to the Steering Committee that the earliest Panama might be complete for 12 migration to begin would be August 1, 2006. At this point, according to CW8, the Operating 13 Committee assigned August 1, 2006 as the external date for release and July 1, 2006 as the internal 14 date for release. CW8 confirms that the internal release date was set so as to make sure that the 15 external date was met.

16 (l) According to CW8, by 2006 the Operating Committee was documenting and 17 reporting to the Steering Committee confidence indexes as to the likelihood of meeting the August 18 2006 release date. On March 1, 2006, the Operating Committee reported to the Steering Committee, 19 which included Nazem who reported directly to Semel, and Weiner and Meisel who reported directly

20 to Rosensweig, a 70% confidence index for the August 1, 2006 external release and a 60% 21 confidence index for the July 1, 2006 internal release. As of March 22, 2006, the Operating 22 Committee reported to the Steering Committee a significantly lower confidence index on the release 23 dates because of complications with purchasing the hardware for the project and because the code 24 was only 49% complete as of March 22, 2006. According to CW8, in March 2006 the Operating 25 Committee figured out that the project needed $31 million for hardware rather than $13 million. As 26 a result of the problems, the Operating Committee reported to the Steering Committee a lowered 27 confidence index of 60% for the August 2006 external release and a 50% for the July 2006 internal 28 release. According to CW8, who was on the Operating Committee, there was no chance that either

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1 the August 2006 external date or July 2006 external date could be met. CW 1 also reported that he 2 told Nazem in a weekly meeting with him that the August 2006 date could not be met. 3 (m) According to CW8, Panama encompassed massive code writing for several 4 new systems including, an entirely new user interface for advertisers to navigate, a reliable billing 5 and cash management system to handle millions of transactions, and a new ranking software and 6 new database to keep track of millions of clicks. Ultimately, more than a year to design, write and 7 test the code for Panama. According to CW8, no code was actually written until 2006. CW8 also 8 confirms that by May 22, 2006 only 49% of the code had been written and on March 22, 2006, the 9 Operating Committee reported this information to the Steering Committee. CW8 confirms there was 10 no chance that either the August 2006 external date or July 2006 internal date could be met with the 11 code only 49% complete as of May 22, 2006. 12 (n) CW8 confirms that even if Panama could be completed by 2Q 06, which it 13 could not, the migration process would still take time, and no revenues would be realized from 14 Panama until the advertising customers were migrated to the new platform and the new monetization 15 system was turned on. According to CW8, by the fall 2005 defendants had given migration a two 16 month time frame, but it was not supported by any reliable information. CW8 confirms that the two 17 month migration schedule was merely a deadline that worked for defendants’ schedule but there was 18 no reasonable basis to support that it could be accomplished in that time frame.

19 (o) CW8 states the migration process required input from Yahoo!’s sales 20 department, who dealt directly with the advertising customers and worked with the customers during 21 migration. CW8 confirms that defendants simply calculated the time for the migration by doing a 22 gross calculation of the number of advertisers they could technically move in a day and failed to take 23 into account the realities of moving over a half million customers to a new platform. According to 24 CW8, there was no communication between the engineers and the sales department, regarding the 25 details of the migration plan, which was essential for a smooth transition, until August 2006. 26 According to CW8, after the sales department was consulted on the migration plan in August 2006, 27 the technical and human elements of the process were taken into account and the schedule was 28 increased from two to six months. CW8 confirms the defendants had prior experiences with

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1 migration of other products and knew of the technical difficulties and difficulties working with 2 customers, but according to CW8 defendants did not account for those issues in the Panama 3 migration schedule because of the pressure to get Panama released. CW8 confirms that there was no 4 feasible migration plan in place until August 2006 and according to CW8, it took six months, until 5 April 2007 for migration to be completed.

6 (p) According to CW8, the migration phase was crucial, because according to 7 CW8, the Company would not fully realize the economic benefit from Panama until migration was 8 complete. Panama was expected to maximize results for Yahoo!’s advertising customers. Thus, 9 according to CW8, out of fairness to its customers the Company made a decision to not activate 10 Panama’s new bidding ranking system, which was the primary monetization component of Panama,

11 until all existing customers were switched over to the new platform. 12 (q) CW8 states that Nazem and Weiner met regularly with Semel, Decker and 13 Rosensweig to discuss the status of Panama and would have reported to Semel, Decker and 14 Rosensweig the Operations Committee’s opinion in December 2005 that Panama could not be 15 released by 2Q 06 as defendants were promising investors. 16 202. Confidential Witness #9 (“CW9”) worked for Yahoo! from December 2003 to 17 February 2007, holding a number of positions in the Customer Solutions Group, dealing with 18 Yahoo! advertising customers. In early 2006 s/he was assigned to the CAR team where s/he stayed 19 until s/he left Yahoo! in 2007. The CAR team was responsible for handling customer complaints

20 regarding click fraud. CW9 reported to Christina Poe, the manager of Customer Service. CW9 21 stated that based on the customer complaints, the vast majority of the complaints about click fraud 22 were associated with Yahoo!’s Content Match and Domain Match because these programs resulted 23 in poor quality traffic. In addition to the poor conversion rate of Content Match partners advertising 24 customers were overcharged for the dramatic increase in clicks on their ads posted on the poor 25 domain partner sites. Customers were troubled that Yahoo! did not allow its advertising customers 26 to “opt out” of Domain Match. Regardless of whether customers selected Content Match or 27 Sponsored Search, the ads were sent to Yahoo!’s domain partners which had an incentive to commit 28 click fraud or increase non-billable clicks since they received a portion of the revenues from Yahoo!.

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1 Yahoo! had thousands of Content Match and domain partners and was not willing to block poor 2 quality partners because that decision would decrease Yahoo!’s revenues. There was no formula or 3 process to determine how a customer was entitled to a refund, but rather it was a judgment call made 4 by the Loss Prevention Group which also reviewed the claim. A customer complaint had to be 5 received within 60 days or it was rejected. CW9 was fired after the Class Period in 2007 when 6 defendant Decker disapproved of his/her handling of a customer complaint. CW9’s supervisor told 7 him/her that Decker had reviewed his/her notes of his/her interactions with a customer on the 8 Customer Relationship Management system, and was upset because CW9 promised the customer a 9 refund. 10 203. Confidential Witness #10 (“CW 10”) is a former Engineering Director with Yahoo! in 11 Pasadena, California who worked for Overture when it was acquired by Yahoo! in October 2003. 12 CW 10 worked at Yahoo! following the Overture acquisition until January 2005. CW 10 was one of 13 dozens of legacy Overture engineers who ultimately were terminated by Yahoo! as part of the 14 Overture integration plan even though the Overture engineers were more knowledgeable than the 15 Yahoo! engineers about how the Overture information systems operated. While employed at 16 Yahoo!, CW 10 worked in the Yahoo! Search Marketing Business Information systems group and 17 had 38 to 40 individuals reporting to him/her from the click fraud analytic team, the data reporting 18 team and the data operations team. All of these teams were focused on processing data related to 19 searches and clicks. For example, some of the data was analyzed to determine whether it related to

20 non-billable clicks. Other data related to gross revenue that was uploaded for Yahoo!’s Oracle 21 Financial system and other still was related to specific advertisers that was filtered and loaded onto 22 the Business Information website so the advertising customer could access data specific to it. 23 According to CW 10, some examples of click fraud were computer click fraud and when Yahoo!’s

24 affiliates deliberately clicked on advertisements on their own websites in order to boost their own 25 revenue. One of the important functions of the various teams CW 10’s employees worked for was to 26 calculate discard rates by analyzing which clicks could not be passed on to advertisers and thus 27 should be eliminated from billing. Yahoo!’s discard rates were analyzed for each marketing partner

28 to determine whether they were poor quality partners. CW 10 confirmed that Yahoo! had a large

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1 problem with poorer quality international partners and that these problems notwithstanding, Yahoo! 2 would not allow advertising customers to opt out of international partner traffic up to the time s/he 3 left Yahoo!. While s/he worked for Overture prior to that company’s acquisition by Yahoo!, 4 Overture routinely ended its relationship with poorer quality partners who had unacceptable discard 5 rates. Overture maintained high standards and maintained score cards for partners to ensure high 6 conversion rates by customers. Following the Overture acquisition, however, Yahoo! was not as 7 concerned with the quality of the traffic from marketing partners. Yahoo! failed to evaluate the 8 marketing partners set up by Yahoo! employees and who as a result received advertising revenue 9 directly from Yahoo!. One particular affiliate that generated poor traffic, and about which Yahoo! 10 regularly received complaints from advertisers, was Gator. Yahoo! continued to do business with 11 Gator as its affiliate despite the numerous customer complaints. Yahoo! had a “CVS code log” 12 system in place and a method to track changes to the software system which allowed the Company to 13 alter the click detection standards. The Code Versioning System (“CVS”) allowed Yahoo! to amend 14 the method that determined whether or not a click was billable. CW 10 was responsible for granting 15 access to the revenue reporting system at the Overture Pasadena facility and gave defendant Decker 16 access. Yahoo!’s CRM system kept track of refunds provided to advertisers. CW 10 confirmed that 17 Yahoo! only gave refunds upon request and would only develop code to eliminate unwanted clicks 18 after the click analysis team determined that a specific customer was having problems. Yahoo! 19 monitored the quality of clicks and details regarding the specific partner site on the Business

20 Information intranet. CW 10 also confirmed that Yahoo! did not provide his/her group with adequate 21 funding for increasing the number of servers to upgrade the systems so his/her team could post all 22 data required under the contract with advertisers on the Business Information intranet. This 23 information was supposed to be filtered so non-billable clicks were eliminated. Yahoo!’s ability to 24 filter out non-billable clicks was impacted by its refusal to provide adequate resources. At the time 25 CW 10 left Yahoo! in February 2005, the Company was extremely far behind in completing a project 26 known inside the Company as “solving the blob,” a necessary precursor to Panama. This project 27 involved integrating the very separate software systems such as the CRM system and the click 28 detection system into a single platform. This integration was essential so that Yahoo! could comply

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1 with the terms of the contract with advertising customers and provide filtered data on a timely basis. 2 CW10 confirmed that this project was far behind schedule because Yahoo! fired the Overture 3 engineers most knowledgeable about the different systems. 4 204. Confidential Witness #11 (“CW11”) is a former advertising account manager of

5 Yahoo! and Overture, and worked for Yahoo! after it acquired Overture in the fall 2003. CW1 1 6 worked for Yahoo! until December 2004 as the account manager for the Diamond Sales Group, and 7 managed portfolios with the largest revenue contributors to Yahoo!. Since leaving Yahoo! to the 8 present, CW11 has been an advertising customer of Yahoo!. At the time of the Overture 9 acquisition, Yahoo!’s Overture platform was severely overloaded because it was not designed to 10 handle the amount of traffic it was experiencing. This caused system crashes and the inability of 11 clients to access their accounts for days at a time. Even though Overture was producing most of 12 Yahoo!’s revenue, the Pasadena office could not get approval from Yahoo!’s corporate headquarters 13 for additional servers to deal with Yahoo!’s enormous internet traffic. The platform’s limitations

14 caused down time, reporting problems, account access problems and new product failures. CW 11 15 also confirmed that at the same time Yahoo! sales managers were asking customers when the most 16 opportune time to roll out Panama was from a customer perspective, 2Q 06, 4Q 06 or 1Q 07, they 17 were promising on a monthly basis that Panama would be ready for release the following month. 18 Yahoo!’s assurances to the market that Panama would be ready for a 3Q 06 launch were not 19 achievable because the user interface, the front end of Panama, was not ready and the algorithm was

20 uncertain in 2Q 06 when s/he participated in Panama usability studies in Pasadena. The Overture 21 platform was incapable of handling the increasing numbers of advertisers, marketing partners and

22 users. To address the inadequacies of the system and to deal with the increasing numbers of users, 23 Yahoo!, through Overture, continued working on the development of Panama, a software project 24 designed to handle extremely large amounts of data and nimbly allow advertisers to bid on key 25 words and simultaneously map search listings to content. When Yahoo! rushed Content Match to 26 market, it had a manual mapping process that led to wide variations in search results. After its 27 release, Content Match demonstrated extremely poor mapping capabilities. Sales personnel 28 routinely received calls from angry customers, complaining about clicks to their sites coming from

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1 irrelevant sources or “bad traffic,” as well as large volumes of clicks that should have been filtered 2 out as resulting from click fraud. Content Match also led to “click tsunamis.” A click tsunami

3 occurred when a search mapped to results that caused thousands of clicks, with little or no 4 conversion, on an advertiser’s site. CW 11 provided an example of a click tsunami as when a

5 mortgage seller’s ad would appear on a news article announcing a Federal Reserve interest rate cut. 6 A large volume of readers would click on the ad next to the article thinking they would obtain more 7 information about what impact the Federal Reserve’s action would have on mortgage interest rates 8 and instead clicked through to the mortgage seller’s website. Because Yahoo!’s Content Match 9 system lacked the necessary method to prevent the resulting onslaught of clicks, the small advertiser 10 who may have only budgeted for $200/day would receive billing for thousands of dollars, far 11 exceeding the budget or capacity to pay. CW 11 also confirmed that Content Match lacked any 12 features to prevent actual click fraud or any method to monitor any sort of referral log data to 13 eliminate non-billable clicks. CW 11 also stated that Yahoo! aggressively marketed to affiliates 14 without any sort of filter to make up for lost traffic from MSN. 15 205. Confidential Witness #12 (“CW12”) was a former Operations Sales Manager who 16 worked for Overture and then Yahoo! throughout the Class Period. In June 2000, CW12 was 17 employed in a customer service capacity by GoTo.com, which later became Overture. By 2001, 18 CW 12 moved into a sales role and eventually became an Operations Sales Manager and continued 19 his/her employment with Yahoo! after Yahoo!’s acquisition of Overture in October 2003 until s/he

20 left Yahoo! in October 2006. 21 (a) As an Operations Sales Manager, CW 12 was involved with anything that had 22 to do with sales and was an integral member of the product team as well as having a Project 23 Management role in the initiation and roll out of Panama.

24 (b) Based on having worked with Overture and then Yahoo! for over six years, 25 and staying up-to-date regarding new products in the search marketing arena, CW 12 confirmed that 26 within six months after Google’s launch of Adsense in June 2003, Google began to take significant 27 market share from Overture and then Yahoo!. Despite Yahoo! being a much larger company than 28 Google, given Google’s success with Adsense, the associated increased traffic and the development

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1 of significant contextual ad networks based on relationships with publishers of all sizes, Google 2 quickly became more attractive to advertisers and publishers alike.

3 (c) Real problems emerged when Yahoo! acquired Overture because Yahoo! took 4 the project away from the direction of Meisel and the Overture engineers. Yahoo! “fumbled” the 5 project and it was drastically “stalled, delayed and derailed.” This occurred because Yahoo! had 6 gotten rid of the technical experts and underestimated the scope and complexity of the project. 7 CW12 emphasized Overture (and later Yahoo!) had to execute “perfectly” to continue to compete 8 with Google, yet Yahoo! fumbled and failed to execute in a manner that would have allowed Yahoo! 9 to remain competitive with Google.

10 (d) Senior Yahoo! executives, including Phu Hoang, came to the legacy Overture 11 facility in late 2004, and under the direction of Hoang and others, legacy Overture masters and 12 technical heads were alienated. The alienation of these individuals was significant because 13 according to CW12, the legacy Overture systems were held together with “bailing wire and duct 14 tape.”

15 (e) According to CW 12, Google was dominating the market through out 2005 and 16 Yahoo!’s revenues began suffering as a result. As a consequence of the Panama launch continuing 17 to “slip” and the fierce competition from Google, Yahoo!’s revenues began to decline “month by 18 month” beginning in 4Q 05. CW12 was aware of the decline in revenues for several reasons. CW12

19 heard individuals at Yahoo! say that the Company was “not hitting its numbers” in the 4Q 05

20 timeframe. S/He also saw traffic forecasts that showed where Yahoo! expected to be in 4Q 05 and 21 knew from his/her review of the actual revenues that Yahoo!’s revenues were declining. CW12 22 knew from his/her attendance at weekly Platinum Customer Service team meetings in 4Q 05 that 23 Yahoo! was missing its 4Q 05 traffic forecasts by approximately 10% to 15%. Because Yahoo! was 24 not meeting its traffic forecasts, the Company was not attaining its revenue forecasts associated with 25 those clicks in 4Q 05. In addition, according to CW 12, customers and clients began complaining in

26 4Q 05 about not attaining the projections that Yahoo! had provided to them. Yahoo! typically 27 provided its advertising customer and clients with spreadsheets that showed how many clicks, 28

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1 conversions and other key measurements they would likely experience in a given month while 2 working with Yahoo!.

3 (f) During the Class Period, CW 12 confirmed that Yahoo! failed to initiate more 4 sophisticated click detection standards and systems, despite regular customer complaints about the 5 consistent low quality of clicks. Yahoo! refused to investigate the click fraud problem by 6 confronting or ceasing relationships with known perpetrators of click fraud, including partners

7 and/or advertisers whose IP addresses showed up on a recurring basis as the source of clicks about 8 which customers complained. Complaints about click fraud also were regularly received from large 9 advertising agencies that represented advertisers and acted as liaisons between Yahoo! and its 10 advertising customers. 11 (g) According to CW12, Yahoo! launched the Yahoo Publisher Network in 12 August of 2005 to attempt to compete with Google’s Adsense and it was a “total failure.” Although 13 YPN allowed Yahoo! to recognize millions of dollars in revenue, it was based on lower quality 14 traffic. As more customers utilized the contextual match product, and after Yahoo! launched YPN, 15 the issue of poor traffic quality associated with Content Match escalated. Customers could evaluate 16 the source of the traffic on their ads and were able to couple this data with the rate of conversion of 17 clicks on their ads to determine that the clicks and traffic associated with contextual match were 18 “bogus” more often than with the Sponsored Search site. According to CW 12, there were massive 19 holes in the contextual match system, so that the system was unable to effectively detect these bogus

20 clicks and eliminate them from billing. Although CW 12 emphasized that Yahoo! received customer 21 complaints about click fraud prior to the launch YPN, but Yahoo!’s release of YPN exacerbated the 22 click fraud problems and corresponding complaints. YPN further led to irrelevant non-billable 23 clicks because Yahoo! allowed partners to enter their own meta-tags to associate keywords with the 24 content on their sites. Smaller, less reputable publishers could and did enter meta-tags associated 25 with key words that generated significant clicks for which they could recognize revenue, even if the 26 content on the site was irrelevant and did not correspond to such keywords.

27 (h) Yahoo!’s attempt to compete with Google’s Adsense by launching YPN in 28 August 2005, thus its intent to recover market share lost to Google, was unsuccessful, mainly due to

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1 the stark differences between the products. While Google allowed most publishers to join Adsense 2 and utilized an objective algorithm for matching purposes, partners seeking to join YPN were subject 3 to manual review of their websites, and Yahoo! reviewers made their “best subjective guess” as to 4 the substance of the website content and what types of ads would be relevant to the website. This 5 manual matching procedure led to inaccuracies and inefficiencies and took substantial time. 6 Furthermore, CW 12 confirmed YPN exacerbated the poor quality of Content Match for advertisers, 7 particularly for small customers whose ad budgets would be quickly depleted with negligible benefit 8 to the customer. For example, if a small local customer had a dog grooming business, he or she 9 would only want his or her ads to appear on websites that focused on the geographic area of his 10 business, rather than on a site of a large content partner, such as MSNBC. YPN was incapable of 11 limiting such local ads to local sites, diminishing the contextual relevance of the advertisement, and 12 increasing the dissatisfaction of such customers with the advertising opportunities at Yahoo! YPN 13 also produced other undesirable irrelevant ad placement, such as ads for customers in the travel 14 industry appearing next to articles about terrorist attacks or train accidents. 15 (i) According to CW12, there were always issues regarding click fraud, even 16 prior to Yahoo!’s acquisition of Overture in October 2003. CW12 discussed click fraud issues with 17 many people, including the Manager of Loss Prevention at Yahoo!. According to CW 12, there were

18 “questionable practices” regarding the revenues recognized and refunds granted to customers who 19 complained about click fraud. CW12 was aware Yahoo! delayed refunding any amounts owed to

20 customers until after quarter end because s/he saw refund reports. Complaints from customers came 21 in through the sales department, and the sales personnel, including CW12 would perform some 22 preliminary research regarding the clicks about which customers complained and then would pass 23 the file to the Loss Prevention team. During the Class Period, CW12 was aware of the timing of 24 complaints and subsequent credits to customers’ accounts because s/he followed up on the outcomes 25 of investigations associated with the complaints s/he received via the CRM system. These 26 investigation reports, however, were typically not shared with customers. 27 (j) According to CW12, it appeared to Yahoo! Search Marketing personnel as 28 though there was a “dial” on the click fraud detection system which Yahoo! turned down at the end

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1 of the quarter to allow more non-billable click activity to be passed on to customers, thereby 2 increasing the Company’s revenues at the end of the quarter. The non-billable click activity was 3 being allowed through the click detection system at the end of the quarter, and being passed on to 4 advertising customers in the form of charges to their account. According to CW 12, there were a lot 5 more complaints from advertising customers at the end of the quarter regarding click fraud, as well 6 as noticeably fewer instances of click fraud during the first month of a quarter versus the end of that 7 quarter. Customer Service Representatives used different “talk scripts” at the end of the quarter than 8 at other times during the quarter. These end-of-quarter “talk scripts” provided word for word 9 explanations of how the Customer Service personnel were supposed to respond to complaints at the 10 end of the quarter regarding credits taking longer than “normal,” including there were “technical

11 limitations” resulting from the number of accounts that had to be reviewed to determine whether 12 credits were warranted. 13 206. Confidential Witness #13 (“CW13”) was employed at Yahoo! from November 2003 14 through April 2007. S/he was a Senior Director in Yahoo! Search Marketing from November 2003 15 through November 2005 and then a Senior Director in the Brand Marketing division. CW13

16 reported to a Senior Vice President in both roles, and in both positions at Yahoo! s/he had some 17 exposure to Panama. Specifically, in working on international concerns within the Marketing

18 Division, s/he was aware that the aspects of Panama impacting the international segment were not 19 making progress. CW 13 stated that the leadership of Panama changed three times during the course

20 of the project. There was a “matrix” team which consisted of senior management leaders from 21 Engineering, Project Management, Marketing, Communications, and Finance. The designated

22 leader of the important Engineering group changed three times and the lead of Project Management 23 twice. These leaders were responsible for briefing defendant Semel regarding the status of Panama 24 on a weekly basis, given that Panama became the Company’s top priority. 25 207. Confidential Witness #14 (“CW14”) was a Yahoo! employee from March 2003 to 26 April 2006, working as an engineer in the Search and Marketplace division. His/her group was

27 responsible for developing Yahoo!’s search algorithm for various Yahoo! properties and was the 28 legacy group from Yahoo!’s acquisition of Inktomi in 2003. Executive Vice President Jeff Weiner

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1 was in charge of the Search and Marketplace division and reported directly to defendant Semel. 2 Beginning in approximately August 2005, Yahoo! began placing more ads onto the search pages and 3 various properties pages in order to meet earnings expectations. CW 14 stated that during Search and 4 Marketplace meetings in the second half of 2005, increasing ads was discussed as a way to help 5 Yahoo! meet earnings expectations. The increased ads ruined customers’ search experiences and 6 caused a rift between the Sales group (Search Advertising) and CW 14’s group. The dilution of the 7 search experience was known to defendant Semel because he attended a meeting in August 2005 8 with 10-12 engineers in CW14’s group as part of Semel’s weekly practice to meet with a random

9 dozen employees. Semel promised to look into the issue but never got back to the group.

10 208. Confidential Witness #15 (“CW15”) was an employee of Overture in 2003 before it 11 was acquired by Yahoo! and worked at Yahoo! through January 2007. CW15 oversaw Human 12 Resources and was part of the operations management team. Overseeing Human Resources, CW 15 13 participated in a series of meetings upon Yahoo!’s acquisition of Overture to discuss the 14 technological plan for integrating Overture, and the existing employees’ roles therein. The plan was

15 to utilize Overture’s search business to create revenue in an area in which Yahoo! had no capability. 16 As a member of operations management, CW 15 attended various management meetings where 17 Panama was discussed, as well as Overture’s inadequate search technology to process and function 18 given the huge volume of Yahoo! traffic. In the summer of 2004, a decision was made at Yahoo!’s 19 highest management levels to re-design the technical platform so it could utilize multiple algorithms

20 for relevancy and attempt to be competitive with Google. Panama was scheduled to be complete by 21 the end of 2005. Instead, from its inception Panama experienced massive delays and required 22 Yahoo! to commit more resources to the project in the latter part of 2005. CW 15 attended meetings 23 led by defendant Nazem who was in charge of Panama, regarding the design and executive reviews 24 of Panama during the initial stages of its development.

25 209. Confidential Witness #16 (“CW16”) was employed by Yahoo! at its Corporate 26 Headquarters in Sunnyvale from August 2001 through April 2007. CW16 held the position of 27 Revenue Controller from August 2001 through December 2006, and in that position s/he was 28 responsible for Yahoo!’s revenue accounting and reporting company-wide. CW 16 had substantial

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1 direct contact with defendant Decker. CW 16 confirmed that since Yahoo! acquired Overture in 2 2003, it established a reserve for “bad revenue” resulting from click fraud or other click traffic that

3 could require refunding customers. In establishing its reserves following the Overture acquisition, 4 Yahoo! utilized a virtually identical refund rate that Overture had set for bad clicks it had 5 experienced in its search business. Because this was the largest reserve for revenue derived from the 6 search business, which was the largest single revenue component of Yahoo! and produced half the 7 Company’s revenue following its acquisition of Overture, it was a “high-level” calculation for which

8 defendant Decker had the final authority. CW 16 was certain defendant Decker had to approve 9 customer refunds in excess of a certain dollar amount.

10 210. Confidential Witness #17 (“CW 17”) worked for Yahoo! from October 1999 through 11 July 2007. CW 17 held the position of Content Editor from the start of the Class Period through 12 2005, and in this role s/he was responsible for evaluating customers’ websites and identifying the 13 key search words that would be most relevant for the customer in a search advertising campaign, and 14 thus was familiar with Content Match. According to CW17, the distribution of advertisements via 15 Content Match was “questionable” because advertisements were being placed on websites that 16 contained content irrelevant to the advertisement. For example, an advertisement for appliance 17 repair was inappropriately placed on a travel website. In such instances of bad and irrelevant 18 matching, Yahoo!’s Content Match customers were charged for clicks on their advertisements placed 19 on these unrelated websites, even though visitors to those websites were not seeking the advertised

20 services or products, and as such were unlikely to purchase such services or products even if they did 21 click on the advertisement. Also, for at least July 2005 through the end of the Class Period, the 22 advertising agencies with which CW17 worked consistently complained about click fraud taking 23 place on their clients’ advertisements with Yahoo!. 24 DEFENDANTS’ KNOWLEDGE AND ADDITIONAL INDICIA OF SCIENTER 25 Defendants’ Knowledge of the Fraud 26 211. Throughout the Class Period, defendants repeatedly held themselves out to investors 27 and the market as the persons most knowledgeable at Yahoo! about the Company’s advertising 28

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1 business, accounting, financial statements and business operations. As described more fully herein, 2 each of the Individual Defendants held one of the most senior positions at Yahoo! with responsibility 3 for directing and managing the Company’s business, accounting and financial reporting. During the 4 Class Period, the Individual Defendants specifically promoted Yahoo!’s “tradition of financial

5 performance and level of candor in its disclosure to the investment community.”

6 212. The Individual Defendants also routinely communicated with analysts and investors 7 during the Class Period and represented that they were informed of and knowledgeable about 8 Yahoo!’s business and finances. As described herein, each of these defendants participated in 9 Yahoo!’s quarterly and annual conference calls with analysts and investors. In the course of these 10 calls, defendants presented information regarding Yahoo!’s revenue growth, market outlook and 11 adaptation to changing market factors. In addition, defendants represented that they had intimate 12 knowledge of these areas and responded to questions focused on issues such as the acquisition and 13 integration of Overture, Panama, click fraud, revenue growth and the Company’s accounting and 14 financial reporting. Defendants consistently discussed these areas in depth. For example, 15 defendants described the acquisition and integration of Overture as exceeding their expectations, and 16 touted the technical capabilities attained as well as the technical capabilities they were building as 17 part of Panama. Defendants described their relentless focus on delivering this technology to provide 18 the best search experience for users, and related their successes on the technology front, including a 19 seamless introduction of this technology, emphasizing that the Company achieved strong growth.

20 Defendants commented that click fraud was not a significant issue because their filtering technology 21 had it well under control. At no time did any of the Individual Defendants respond that they were 22 uninformed about any material aspect of Yahoo!’s business.

23 Overture 24 213. Defendants had personal knowledge of the Overture acquisition and the associated 25 problems as they repeatedly told the media, investors and securities analysts during interviews, 26 quarterly conference calls and investor conferences, that Yahoo! was able to achieve growth 27 exceeding 50% following the acquisition of Overture. Because of the importance of the Overture 28 acquisition to Yahoo!’s overall performance and the development of a new search platform,

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1 defendants were well-informed about all aspects of the Overture acquisition. For example, because 2 it was important to integrate into the new platform, the separate systems used to monitor and analyze 3 click and search data, the defendants knew that a significant culture clash between the product and 4 software engineers from Yahoo! and Overture would lead to disastrous results. Defendants knew 5 that the Overture platform was overwhelmed by the increased Yahoo! traffic after the acquisition 6 and that the Overture engineers’ requests for additional resources to process the data necessary to 7 provide advertising customers with meaningful account data were ignored. Furthermore, according 8 to CW 12, Yahoo!’s decision to remove the most senior and knowledgeable Overture engineers from 9 Panama and give that project to Yahoo! engineers had a disastrous impact to the development 10 schedule for that project. As a result, Panama was delayed and derailed. Notwithstanding these 11 delays, defendants nonetheless assured investors that the Overture acquisition was smooth. In 12 addition, defendants assured investors that Yahoo!’s introduction of its own search technology went 13 well despite their knowledge that the Overture platform was bursting at the seams and the 14 development of the search platform was plagued with delays and management and personnel 15 turnover.

16 Panama 17 214. Panama was one of Yahoo!’s most important projects with regard to competing with 18 Google. Defendants constantly monitored the progress of the development of Panama. Following 19 the transfer of Panama to Sunnyvale, for oversight by Nazem, Nazem had control of the project and

20 gave updates regarding the progress to the other defendants. Notwithstanding the massive delays in 21 the development of Panama, defendants continued to falsely assure investors and securities analysts 22 – who were very concerned about when Yahoo! would begin to achieve revenue from the new 23 Panama search platform – that the Company was on the verge of completing Panama at the same 24 time they knew the project was delayed and that they had no basis to provide assurance when the 25 project would be complete.

26 215. Defendant Nazem was intimate with the development of Panama. According to 27 CW1, Nazem removed Executive Vice President of Engineering Phu Hoang from Panama after 28 Hoang’s efforts to lead Panama “failed miserably” in summer 2005. According to CW8, in the

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1 summer of 2005, a Panama Operating Committee was created to develop the project. However, 2 resources weren’t committed to the project until October 2005. Defendant Nazem selected CW1 to 3 assume leadership of Panama as of October 2005, and placed CW 1 under “a lot of pressure” to “get 4 it [Panama] out there immediately.” In October 2005, defendant Nazem and other Yahoo! staff 5 made Panama a high priority and began to pull resources off other projects to support Panama. At 6 the same time, Decker also became an integral part of Panama’s management since as the CFO she 7 was responsible for spending on the project. At the same time, Nazem took responsibility for 8 Panama away from the legacy Overture facilities and based it out of the Company’s headquarters in 9 Sunnyvale.

10 216. The Operating Committee was responsible for the day-to-day operations of Panama 11 and was comprised of leaders of the various functional teams that worked directly on building 12 Panama which included engineering management, architecture, applied engineering, serving 13 engineering, offers engineering, advertiser experience and program management. The Operating

14 Committee met daily, and reported at least weekly to the Steering Committee on the timeline and 15 progress of the build of Panama. The Steering Committee was created in fall 2005 and included 16 Nazem, Jeff Weiner and Ted Meisel. The Operating Committee also reported weekly to the Steering 17 Committee on the likelihood of meeting the various schedules for rolling out Panama. The role of 18 the Operating Committee was to guide and clear obstacles, manage overall priorities, identify and 19 manage overall dependencies, help resolve issues, make policy decisions, resolve conflicts and make

20 scope tradeoffs. 21 217. As head of the Steering Committee, defendant Nazem received weekly status updates 22 from the members of the Operating Committee on the status of Panama. The Steering Committee 23 met weekly and reported on the status and progress of Panama to the Executive Sponsorship 24 Committee on at least a bi-weekly basis. The Executive Sponsorship Committee, included 25 defendants Decker, Rosensweig and Semel. As members of the Executive Sponsorship Committee 26 defendants Rosensweig, Decker and Semel received at least bi-weekly reports about the status and 27 progress of Panama. 28

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1 218. According to CW1, defendant Nazem traveled to the Burbank facility every 2 Wednesday for updates on Panama’s progress from the Operating Committee. CW 1 confirmed that 3 defendant Nazem also met on a weekly basis with defendants Semel, Decker and Rosensweig in 4 Sunnyvale, and stated that defendant Nazem provided updates on Panama in his weekly meetings 5 with Semel, Decker and Rosensweig. According to CW 1, Nazem repeatedly stated that Panama was 6 the “number one priority” for Yahoo!. Beginning in December 2005, and continuing every day 7 thereafter, CW 1 confirmed that the Operating Committee assigned a “confidence number” to the

8 likelihood of meeting Panama’s August 2006 launch date. As of April 2006, the schedule for 9 Panama had slipped yet again, and during the weekly Wednesday meetings with the Operating 10 Committee in Burbank, CW 1 told defendant Nazem that the August 2006 launch date was not going 11 to be met. CW 1 confirms that Nazem in turn shared that information with defendants Semel, Decker 12 and Rosensweig during their weekly meetings in Sunnyvale.

13 219. CW2 recalled a visit by defendant Nazem to the Pasadena facility around March 2006 14 to meet with sales management. During that meeting, defendant Nazem confirmed that Yahoo! had 15 committed extraordinary resources to Panama since the fall of 2005. CW2 also confirmed that 16 Panama was delayed because the back-end systems were still not ready. 17 220. CW4 stated that Panama was “going nowhere” until defendant Nazem and the 18 Company devoted more resources to Panama and transferred control of it to the Company’s 19 headquarters in Sunnyvale in the fall of 2005. At that time, Yahoo!’s management decided that

20 leaving control of Panama in the Overture facility was not resulting in any clear progress. CW4 21 recalled that Panama’s delays weren’t a result of which location controlled Panama, as much as they 22 were a result of the extreme turnover of personnel. CW4 himself had seven different managers in 23 the 18 months before control of Panama was turned over to the Company’s headquarters in 24 Sunnyvale. CW4 confirmed that Panama was run out of defendant Nazem’s office in Sunnyvale 25 after control was transferred there in the fall of 2005. 26 221. CW7 related that as a necessary precursor to Panama, all code that was originally 27 written for Overture had to be broken down into components known as “solving the blob.” 28 According to CW7, originally, “solving the blob” was scheduled for completion in Q3 or Q4 2005,

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1 however the blob had not yet been solved, and this precursor was not yet completed, when CW7 left 2 Yahoo! in February 2006.

3 222. CW 10 also described “solving the blob” as a necessary effort to integrate numerous 4 components of the Overture platform into a single platform, in order to improve the Company’s

5 data-handling capabilities in advance of Panama. As CW 10 explained, Yahoo!’s contracts with its 6 advertising customers required Yahoo! to post the previous day’s click data on the Business 7 Information intranet by a specific time the next day for the advertisers to review and analyze. This 8 click data was supposed to be filtered so that non-billable clicks were eliminated. However, as 9 Yahoo! increased the traffic on the legacy Overture systems, these overburdened systems could not 10 handle the data volume and Yahoo! was not meeting the contract requirement. 11 223. At the time CW 10 left Yahoo! in February 2005, this “solving the blob” project was 12 extremely far behind, which resulted in delays to Panama’s schedule. CW 10 confirmed that the 13 “solving the blob” project was delayed due to Yahoo! firing or alienating the Overture engineers 14 most knowledgeable about the disparate systems which needed to be integrated.

15 224. CW 11 confirms this, and reported that the Overture platform was overly burdened 16 after Yahoo! acquired Overture. In the view of CW 11, this increased traffic was making the system 17 literally self destruct, by causing down time, reporting problems, account access problems, and new 18 product failures. 19 225. CW 12 described a project Overture initiated in 2003, under the direction of then-CEO

20 Ted Meisel, known internally as Overture 2.0. This project was aimed to take Overture off the “duct 21 tape and bailing wire” systems that had sustained Overture as a startup, and consisted of a new 22 customer interface, a new algorithm, and a new revenue-generating process that emphasized 23 relevance over bid amounts in ranking results. CW 12 stated that Overture 2.0 was scheduled to be 24 completed in two years, however when Yahoo! acquired Overture, it took control of the project away 25 from Meisel and the Overture engineers. Yahoo! “rebranded” Overture 2.0 as Panama, and put it 26 under the direction of Executive Vice President of Engineering Phu Hoang. Hoang came to the 27 Overture facility in late 2004, but instead of driving Panama, Hoang alienated legacy Overture 28 technical heads. CW 12 participated in a meeting in early 2006 where defendant Nazem announced

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1 that Project Symphony was being scratched so that all of its resources could be redirected to Panama. 2 In CW12’s view, Panama was not well managed by Yahoo!, causing the schedule to slip. In the 3 January to February 2006 timeframe, there was a “big joke” at the Overture facilities as to whether 4 Panama would ever be launched.

5 226. CW 13 stated that the leadership of Panama and the all-important engineering group 6 changed three times during the course of the project.

7 227. CW15 sat in on numerous management meetings where Panama was discussed, as 8 well as the fact that the legacy Overture system could not handle the volume of data Yahoo! ran 9 through it. Additionally, CW 15 attended meetings led by defendant Nazem, who was the chief 10 executive in charge of Panama. In the summer of 2004, a decision was made at Yahoo!’s highest 11 levels to re-design the technical platform so it could include multiple algorithms for relevancy, in 12 order to compete with Google. This re-design, which became part of Panama, was to be completed 13 by the end of 2005. However, according to CW 15, there were massive delays, requiring Yahoo! to 14 commit more resources to the project in the latter part of 2005.

15 Systems and Controls 16 228. The Individual Defendants constantly monitored the performance of Yahoo! via their 17 access to the information systems in use by the Business Information Systems group at the Overture 18 facility in Pasadena. These systems include billing systems, a click fraud detection system, and a 19 search servicing system, which supported Yahoo!’s Sponsored Search project, contextual

20 advertisement programs, one or two domain match products, and Yahoo!’s local match product, 21 according to CW3. 22 229. The Individual Defendants relied on Yahoo!’s CRM system. CW9 was told that 23 defendant Decker reviewed the notes of his interactions with a customer on the CRM system. 24 Defendant Decker was upset over CW9’s handling of a click fraud complaint by a customer whose 25 $20 per day of typical charges had spiked to $8,000 in one day. Defendant Decker was unhappy that 26 Yahoo! was going to have to refund the $8,000 to this customer, blamed CW9 for the refund, and 27 ultimately fired CW9 for the way CW9 handled this click fraud complaint. 28

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1 230. The Individual Defendants were each aware of the immense amount of data that had 2 to be processed in order for Yahoo! to function properly. This work was accomplished by the teams 3 in the Yahoo! Search Marketing Business Information Systems Group: the click fraud analytic team, 4 the data reporting team and the data operations team. All of these teams were focused on processing 5 data related to searches and clicks, and reported to CW10. For example, some of the data was 6 analyzed to determine whether it related to non-billable clicks. Other data related to gross revenue 7 was uploaded to Yahoo!’s Oracle Financial system. Other data was related to specific advertisers 8 that was filtered and loaded onto the Business Information website so the advertising customer could 9 access its click data as called for by Yahoo!’s SLAs.

10 231. Yahoo! had a “CVS code log” system in place which provides a method to track any 11 changes to software code. The CVS log was used by Yahoo! to track changes to the software or 12 rules which determined whether a click was billable. These rules, for example, would not allow two 13 clicks in a row from the same source and IP address to be billable. A CVS system is one way in 14 which a company can implement some of the controls called for by Sarbanes-Oxley. Typically CVS 15 is used by a company and its auditors to control and track changes made to software code. In 16 signing the requisite Sarbanes-Oxley certifications, defendants Semel and Decker certified that they 17 had access to and were familiar with the controls of the CVS system.

18 232. CW 10 was also responsible for granting access to the revenue reporting system at the 19 Overture Pasadena facility and gave defendant Decker access. CW 10 confirmed that Yahoo!’s CRM

20 system kept track of refunds provided to advertisers, consistent with CW9’s experience with 21 defendant Decker.

22 233. CW12 stated that defendant Rosensweig was aware of the failure of Project 23 Symphony and the impact this would have on Panama.

24 Click Fraud 25 234. CW3 led the click fraud detection team and stated that Yahoo! management decided 26 in late 2004 to “relax” the business rules and filters which were coded into the click fraud detection 27 system for Yahoo!’s advertising partners, in particular Yahoo!’s content match partners, also known

28 as “contextual ad partners.” The business rules incorporated into the click fraud detection system

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1 were designed to track clicks and eliminate clicks that exceeded a certain, specified maximum 2 number of clicks in a given time period. The relaxation of the click fraud rules allowed Yahoo! to 3 generate additional revenues by allowing for the counting of additional improper clicks on the 4 content match partner sites. Because these rules and filters were software code, all changes to these 5 rules were logged and tracked by Yahoo!’s CVS system. In signing the requisite SOX certifications, 6 defendants Semel and Decker certified that they had access to and were familiar with the controls of 7 the CVS system.

8 235. CW6, had regular communication with customers who complained about click fraud. 9 The nature of the complaints was consistent – poor sales results while experiencing large volumes of 10 clicks which depleted the customers’ ad budgets. CW6’s sales peers had the same experiences with 11 their customers. The main cause of complaints was “bad mapping,” which was customer ads 12 appearing in results of non-relevant search terms and was mainly in the content match area. These 13 customer complaints were all logged in Yahoo!’s CRM system, which defendant Decker reviewed, 14 consistent with CW10 and CW9.

15 236. According to CW8 in August 2005, after the launch of YPN, Yahoo! began 16 aggressively pursuing revenue, sharing agreements with domain affiliates and aggregators, including 17 bloggers. CW8 confirms that senior management pursued their agreements in order to compete with 18 Google and to make up for the loss in revenue due to the delays in Panama. During the Class Period 19 CW8 attended several meetings with defendant Nazem, Phu Hoang and the management at the

20 Legacy Overture facility in Pasadena at which Yahoo!’s strategy to gain increased revenue by 21 partnering with these low quality traffic partners (domain affiliates and aggregators) that attracted 22 large volumes of questionable traffic, was discussed.

23 237. CW8 confirms that defendants Nazem, Semel and Decker were all aware of the part 24 of Yahoo!’s business strategy. According to CW8 the Panama Steering Committee met with Yahoo! 25 executives, and in addition to issues and problems related to Panama, discussed the issues of click 26 fraud and the poor quality of traffic provided by low quality affiliates, such as domain affiliates and 27 aggregators, as a huge source of revenue derived from bad traffic. 28

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1 238. Defendant Semel held regular, weekly meetings with a “random dozen” Yahoo!

2 employees throughout his tenure. CW 14 was among the “random dozen” selected to attend a 3 meeting with Semel in August 2005. At that meeting, with 11 engineers from CW14’s group, a 4 fellow engineer asked Semel about the increase in ads appearing in search results, and the entire 5 group of engineers voiced their concern about this negatively impacting Yahoo!’s users. Defendant 6 Semel promised to look into the issue, but never got back to the group.

7 Additional Indicia of Scienter 8 239. As detailed herein, defendants acted with scienter during the Class Period in that they 9 either had actual knowledge of the misrepresentations and omissions of material facts set forth, or 10 acted with reckless disregard for the truth by failing to ascertain and disclose the true facts, even 11 though such facts were readily available to them. In addition to their orchestration of the fraudulent 12 scheme, defendants’ scienter is evidenced by the following: (a) an excess of $879 million in insider

13 trading by the Individual Defendants that was suspicious in nature; (b) the Individual Defendants’ 14 self-interested motivation to preserve their lucrative employment agreements and secure more than 15 $484 million in incentive-based compensation; and (c) the manipulation of the Company’s financial

16 results to meet revenue and earnings estimates.

17 The Individual Defendants and Corporate Insiders Personally Profited from the Fraudulent Scheme 18 240. While defendants were issuing the fraudulent statements identified herein about 19 Yahoo!’s financial results and business, the Individual Defendants sold at least 26,694,443 shares of 20 Yahoo! stock – typically only days after issuing favorable, albeit false, statements about the 21 Company – for an exorbitant amount of insider trading proceeds, in total over $879 million. 22 Notwithstanding the Individual Defendants’ knowledge about the ongoing fraud and their duties as 23 officers and directors of the Company to disclose adverse material facts before trading in Yahoo! 24 stock, the Individual Defendants personally profited from the artificial inflation in Yahoo!’s stock 25 price created by their fraudulent scheme. 26 241. During the Class Period, defendant Semel personally sold 17,766,786 shares of 27 Yahoo! stock for insider trading proceeds of at least $577 million, thereby profiting from the 28

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1 artificial inflation in Yahoo!’s stock price which he and other Individual Defendants fraudulent

2 scheme created.

3 (a) Defendant Semel’s insider trading, following defendants’ release of false and 4 misleading statements to the market, was particularly suspicious. Following defendants’ false and 5 misleading statements regarding the integration of Overture and the quality of Content Match on 6 April 7 and 8, 2004, defendant Semel, who was aware of the truth, personally profited from 7 Yahoo!’s artificially inflated stock price. Between April 12 and April 16, 2004, defendant Semel

8 sold 4,000,000 shares at an average artificially inflated stock price of $27.47 per share, reaping a 9 total of $110,024,870 in proceeds.

10 (b) Following defendants’ false and misleading statements on July 7, 2004 11 regarding Yahoo!’s matching capabilities within paid search, defendant Semel, despite his awareness 12 of the truth, sold 3,000,000 shares of Yahoo! stock at an average artificially inflated price of $30.28 13 per share, for a total of $90,746,500 in proceeds between July 13 and July 27, 2004.

14 (c) Following defendants’ false and misleading statements on October 12, 2004, 15 regarding the quality of Yahoo!’s paid search products and advertising opportunities, defendant 16 Semel, who at the time was fully aware that poor manual mapping technology and irrelevant 17 advertisement placement was leading to non-billable clicks and increased customers complaints, sold 18 another 3,000,000 shares of Yahoo! stock at an average artificially inflated price of $35.36 per share, 19 reaping a total of $106,216,650 in proceeds in just 4 days between October 19 and October 22, 2004.

20 (d) One of the most egregious examples of Semel taking advantage of defendants’ 21 false statements to the market, designed to artificially inflate Yahoo!’s stock price, and at a time 22 when he was aware of the true facts, was following defendant Semel’s false and misleading 23 statements on July 19, 2005 regarding Panama and Content Match. Just seven days later, Semel sold 24 200,000 shares of his Yahoo! stock at an average artificially inflated price of $34.15 per share, 25 reaping proceeds of $6,834,786 while knowing virtually no resources had been devoted to Panama 26 and that Content Match was a poor product. The next day defendant Semel sold another 200,000 27 shares of his Yahoo! stock at an average artificially inflated price of $34.28 per share, reaping 28 proceeds of $6,854,000. A few weeks later, on August 19, 2005, when the price of Yahoo! stock

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1 was still artificially inflated by defendant Semel’s – and other defendants’ – false and misleading

2 statements to the market, defendant Semel sold 542,886 shares at an average price of $34.34 per 3 share, reaping proceeds of $18,627,731. In total, between July 26 and August 19, 2005, when 4 defendants’ false statements on July 19, 2005 were impacting Yahoo! stock by artificially inflating

5 its price, defendant Semel personally profited by selling 942,886 shares for $32,316,517 in proceeds.

6 (e) Defendant Semel also personally profited from the defendants’ false and 7 misleading statements to the market, designed to artificially inflate the price of Yahoo! stock 8 following defendant Semel’s false and misleading statement regarding Yahoo!’s paid search

9 products and Panama on October 18, 2005, at a time when he had knowledge that it was impossible 10 for the Company to realize any economic benefit from Panama in 2005 or 2006. On October 24, 11 2005, defendant Semel sold 913,150 shares at an average inflated price of $35.18 per share for total 12 proceeds of $32,125,676. On October 25, 2005, he sold 639,218 shares at an average inflated price 13 of $35.14 per share, gaining $22,465,241, and on October 26, 2005 he sold 447,632 shares at an 14 average inflated price of $35.36 per share, reaping $15,829,437 in proceeds. The next day, October 15 27, 2005, defendant Semel sold another 500,000 shares at an average inflated price of $35.42 per 16 share, reaping $17,709,601 in proceeds. Then, on October 28, 2005, defendant Semel sold 500,000 17 shares at an average inflated price of $35.60 per share, for a total of $17,799.384 in proceeds. In 18 total, during the five day period from October 24 through October 28, 2005, at a time when 19 defendant Semel knew the true status of Panama and the poor quality of Yahoo!’s paid search

20 products, and knew that defendants’ false and misleading statements were inflating the price of 21 Yahoo! sales, he sold 3,000,000 shares of Yahoo! stock and reaped a total of $105,929,339 in 22 proceeds.

23 242. Semel’s insider trading was not part of any general or specific pre-planned pattern of 24 stock sales, but was timed to profit from the artificial inflation in Yahoo!’s stock price. He sold at an 25 average share price of $32.50, 20% higher than the average trading price of the Company’s stock 26 after the fraud was revealed. In the 21/4 years prior to the Class Period – the same length of time as 27 the Class Period – Semel sold just 2,126,400 shares of Yahoo! stock for proceeds of just $40 million, 28

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1 only 7% of his Class Period sales. Based on defendant Semel’s Form 4s filed with the SEC, as of 2 Semel’s final Class Period trade, he had sold 90% of his Yahoo! stock holdings. 3 243. Defendant Decker personally sold 2,303,333 shares of Yahoo! stock for insider 4 trading proceeds of at least $73.8 million, thereby profiting from the artificial inflation in Yahoo!’s

5 stock price which defendants’ fraudulent scheme had created.

6 (a) Defendant Decker personally profited from the artificial inflation of Yahoo!’s 7 stock price, when she knew the true facts, particularly following Yahoo!’s false and misleading 8 statements regarding Yahoo!’s algorithmic search technology, the integration of Overture, and the 9 matching capabilities of Yahoo!’s paid search products at a May 13, 2004 “Analysts Day.” Just days 10 later, on May 24, 2004, defendant Decker sold 600,000 shares at an average artificially inflated stock 11 price of $29.43 per share, reaping $17,656,904 in proceeds.

12 (b) Another suspicious example of defendant Decker personally profiting based 13 upon defendants’ false and misleading statements to the market, which artificially inflated Yahoo!’s 14 stock price and despite her knowledge of the truth, was following defendants’ false and misleading

15 statements regarding Panama on October 18, 2005. Defendant Decker sold 104,167 shares on 16 November 2, 2005, at an average inflated price of $38.01 per share, reaping $3,959,753 in proceeds. 17 Just over a week later, on November 10, 2005, she sold 104,167 shares at an average inflated price 18 of $38.52 per share, for $4,012,255 in proceeds. Then, less than a week later, on November 16, 19 2005, defendant Decker sold 194,999 shares at an average inflated price of $39.94 per share, reaping

20 $7,788,417 in proceeds. 21 244. Decker’s insider trading was not part of any general or specific pre-planned pattern of

22 stock sales, but was timed to profit from the artificial inflation in Yahoo!’s stock price. She sold at 23 an average share price of $33.53, 20% higher than the average trading price of the Company’s stock 24 after the fraud was revealed. In the 21/4 years prior to the Class Period – the same length of time as 25 the Class Period – Decker sold just 360,000 shares of Yahoo! stock for proceeds of just $6.7 million, 26 only 9% of her Class Period sales. Based on defendant Decker’s Form 4s filed with the SEC, as of 27 Decker’s final Class Period trade, she had sold 84% of her Yahoo! stock holdings. 28

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1 245. Defendant Rosensweig personally sold 2,101,000 shares of Yahoo! stock for insider 2 trading proceeds of at least $70.6 million, thereby profiting from the artificial inflation in Yahoo!’s

3 stock price which defendants’ fraudulent scheme had created.

4 (a) Despite defendant Rosensweig’s knowledge of the true facts regarding the 5 problems with the development of Panama and the poor quality of Yahoo!’s paid search products, 6 and at a time when defendants’ false and misleading statements on July 19, 2005 regarding those 7 issues were circulating in the market and artificially inflating the price of Yahoo!’s stock, on August

8 1, 2005, defendant Rosensweig sold 76,000 shares of an average inflated price of $33.58 per share, 9 for $2,551,580 in proceeds. Just one month later, when defendant Rosensweig was aware these false 10 and misleading statements were still circulating in the market and artificially driving up Yahoo!’s

11 stock price, he sold 76,000 more shares at an average inflated price of $33.16 per share, reaping 12 $2,521,980 in proceeds.

13 246. Rosensweig’s insider trading was not part of any general or specific pre-planned 14 pattern of stock sales, but was timed to profit from the artificial inflation in Yahoo!’s stock price. He

15 sold at an average share price of $33.62, 20% higher than the average trading price of the 16 Company’s stock after the fraud was revealed. In the 21/4 years prior to the Class Period – the same 17 length of time as the Class Period – Rosensweig sold just 598,250 shares of Yahoo! stock for 18 proceeds of just $5.5 million, only 8% of his Class Period sales. Based on defendant Rosensweig’s 19 Form 4s filed with the SEC, as of Rosensweig’s final Class Period trade, he had sold 84% of his

20 Yahoo! stock holdings. 21 247. Defendant Nazem personally sold 4,623,324 shares of Yahoo! stock for insider 22 trading proceeds of at least $157.4 million, thereby profiting from the artificial inflation in Yahoo!’s

23 stock price which defendants’ fraudulent scheme had created.

24 (a) A particularly suspicious example of defendant Nazem taking advantage of 25 defendants’ false and misleading statements to the market was following defendants’ statements on 26 October 12, 2004, at a time Nazem was aware these statements did not reflect the truth about the 27 integration of Overture and the quality of Yahoo!’s paid search products, particularly Content Match. 28

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1 Within three weeks of the false statements, defendant Nazem sold 700,000 shares at an average 2 artificially inflated price of $36.12 per share, reaping $25,283,000 in proceeds.

3 (b) Defendant Nazem, aware of the true status of Panama and the quality of 4 Yahoo!’s paid search products, also personally profited from defendants’ false and misleading

5 statements to the market regarding these issues on October 18, 2005. Within weeks of these false 6 and misleading statements, that were still circulating in the market and artificially inflating Yahoo!

7 stock price, defendant Nazem sold 811,052 shares at an average inflated price of $38.44 per share, 8 reaping a total of $31,220,364 in proceeds between October 26, 2005 and November 23, 2005. 9 248. Nazem’s insider trading was not part of any general or specific pre-planned pattern of 10 stock sales, but was timed to profit from the artificial inflation in Yahoo!’s stock price. He sold at an 11 average share price of $34.06, 20% higher than the average trading price of the Company’s stock 12 after the fraud was revealed. In the 21/4 years prior to the Class Period – the same length of time as 13 the Class Period – Nazem sold just 4,559,084 shares of Yahoo! stock for proceeds of just $61.3 14 million, only 39% of his Class Period sales. Based on defendant Nazem’s Form 4s filed with the

15 SEC, as of Nazem’s final Class Period trade, he had sold 88% of his Yahoo! stock holdings.

16 Executive Compensation 17 249. In addition to the strong motivation provided by lucrative insider selling, the

18 Individual Defendants were highly motivated by the terms of Yahoo!’s equity compensation plans, 3 19 which tied the overwhelming majority of their compensation directly to Yahoo!’s reported financial 20 results and the performance of the Company’s stock. The bulk of each of the Individual Defendants’

21 compensation package was dependent upon Yahoo! posting favorable financial results. In addition to 22 maintaining their employment positions, the personal wealth of each of the Individual Defendants

23 was dramatically enhanced by the reported business and business performance of Yahoo!, as well as 24 the Company’s stock price and market capitalization, all of which were inflated by defendants’

25

26 3 Including the Company’s 1995 Stock Plan, as amended, the Company’s Amended and 27 Restated 1996 Employee Stock Purchase Plan and the Company’s 1996 Directors’ Stock Option Plan. 28

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1 misleading statements and material omissions. Defendant Semel alone pocketed more than $319 2 million in total compensation from FY 04 through FY 06. Defendant Decker pocketed over $58

3 million and defendant Rosensweig reaped more than $52 million. Defendant Nazem was rewarded 4 with more than $54 million for his role in the scheme. In total, the Individual Defendants took in

5 more than $484 million in incentive-based compensation during the Class Period. 6 250. Pursuant to Yahoo!’s FY 04 Proxy dated April 9, 2004, the Board of Directors, acting 7 via its Compensation Committee, established a fixed policy relating to executive compensation, 8 declaring, “[t]he Company has in the past and continues to emphasize the award of stock options in 9 its executive compensation policy.” Among the principle purposes served by that policy was “to 10 link executive compensation to improvements in Company performance and increases in stockholder 11 value as measured principally by the trading price of the Company’s Common Stock.” Primary, of

12 course, was continuing to report strong growth and added value for shareholders. 13 251. In other words, other than a base salary, virtually all of the Individual Defendants’ 14 compensation was based on maintaining Yahoo!’s inflated stock price and thus contingent on 15 covering-up the Company’s increasingly dismal financial performance and failure to adequately

16 combat click fraud. Based on the reported performance of Yahoo!, the Individual Defendants each 17 received the maximum possible incentive compensation, through salary, cash bonuses and options 18 during the Class Period. 19 252. In May 2006, as disclosed in the Company’s corresponding Proxy, “[t]he

20 Compensation Committee decided to use primarily stock options as the pay-for-performance vehicle 21 to best achieve the underlying business objectives.” This decision resulted in Semel’s agreement to 22 accept a base salary of a single dollar, resulting in 100% of his compensation being performance-

23 based and thus tied directly to the trading price of the Company’s common stock. Similarly, the 24 other Individual Defendants each ended up with over 90% of their compensation being performance- 25 based and thus tied directly to the trading price of the Company’s common stock after May 2006. 26 253. Defendant Semel reaped an astounding $319 million in total compensation from the 27 Company during FY 04 to FY 06. His salary was a mere $1.5 million of that, less than one-half of a 28 percent of his total compensation during the Class Period:

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1 Other Options Total Bonus and Compensation Awarded Compensation 2 Non-Equity (“Stock (estimated All Other (including option Year Salary Incentives Awards”) value)4 Compensation value) 3 2004 $600,000 $0 $0 $192,082,520 $1,980 $192,684,500 4 2005 $600,000 $0 $8,687,500 $77,236,639 $1,980 $86,526,119 2006 $250,001 $0 $2,895,833 $36,678,679 $125 $39,824,638 5 6 254. Indeed, in a May 5, 2005 Proxy Analysis, Institutional Shareholder Services, Inc. 7 (“ISS”) voiced concern with the magnitude of defendant Semel’s compensation, stating that “since 8 May 2001, [he] has catapulted into the ranks of the highest paid CEOs in corporate America.” ISS 9 continued, “[t]he size of his aggregate pay package over a multi-year period and the multiple grant 10 pattern within a short time period are concerning.... The internal pay equity is widely disparate

11 with Mr. Semel being paid 481 percent and 1,188 percent higher than the second highest paid 12 executive in 2004 and 2003, respectively.... ISS is concerned with the actions of the Compensation 13 Committee, which continues to award Mr. Semel with mega-option grants.... However, there is 14 little disclosure in the 2005 proxy statement on the following: the rationale for the magnitude of the 15 pay, the reasoning for multiple grants within a short time period, and the purpose of the grants 16 (performance versus retention).... Based on the size of his option grants, Mr. Semel will receive a 17 large payout, even if the company’s performance were to be marginally positive.” Ultimately, ISS 18 reached the rare conclusion that shareholders should withhold votes from Compensation Committee 19 members to send a message about defendant Semel’s exorbitant compensation, “ISS recommends

20 that shareholders withhold votes from Compensation Committee members for their troubling 21 practice of continuously awarding excessive option grants to the CEO, coupled with the absence of 22 their rationale for the awards. With this magnitude of pay, shareholders deserve an explanation for 23 the inspiration behind these awards.”

24

25

26 4 The value of the Options Awarded in these tables is based on either the mean of the potential 27 realizable value, or the dollar amount recognized for financial statement reporting purposes, as reported by Yahoo! in the Company’s corresponding Proxy statements. 28

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1 255. In sum, defendant Semel received more than $319 million in cash and stock from 2 Yahoo! during the Class Period, virtually all incentive-based and above and beyond his standard 3 salary. 4 256. As the charts below demonstrate, the other Individual Defendants were also rewarded 5 well beyond their base salaries as a result of their role in the fraudulent scheme and Yahoo!’s 6 reported results and stock performance during the Class Period: 7 Susan L. Decker

8 Bonus and Other Options Total All Non- Compensation Awarded Compensation 9 Equity (“Stock (estimated Other (including option Year Salary Incentives Awards”) value) Comp’n value) 10 2004 $500,000 $900,000 $1,854,000 $6,181,154 $3,550 $9,438,704 11 2005 $500,000 $1,000,000 $7,246,500 $24,687,242 $3,800 $33,437,542 2006 $500,000 $850,000 $4,833,646 $9,734,140 $41,937 $15,959,723 12

13 Farzad Nazem

14 Bonus and Other Options Total Non- Compensation Awarded Compensation 15 Equity (“Stock (estimated All Other (including Year Salary Incentives Awards”) value) Comp’n option value) 16 2004 $450,000 $700,000 $1,854,000 $6,181,154 $3,550 $9,188,704 2005 $450,000 $800,000 $7,246,500 $24,687,242 $3,800 $33,187,542 17 2006 $479,167 $700,000 $4,632,698 $6,617,280 $4,050 $12,433,195 18 Daniel L. Rosensweig 19

20 Bonus and Other Total Non- Compensation Options Compensation 21 Equity (“Stock Awarded All Other (including option Year Salary Incentives Awards”) (estimated value) Comp’n value) 22 2004 $500,000 $1,425,000 $1,854,000 $6,181,154 $1,259 $9,961,413 2005 $500,000 $1,150,000 $7,246,500 $24,687,242 $3,800 $33,587,542 23 2006 $500,000 $1,050,000 $1,658,853 $5,422,290 $3,995 $8,635,138 24 257. In total, defendants Semel, Decker, Nazem and Rosensweig collected more than $484 25 million in incentive-based compensation while perpetrating their fraud on the investing public. 26 27 28

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1 GAAP Violations 2 258. As detailed herein, the defendants’ violations of GAAP, are further evidence of the 3 defendants’ scienter.

4 YAHOO! ’S FALSE, MISLEADING AND OMITTED FINANCIAL STATEMENTS AND DISCLOSURES 5 259. Yahoo!’s financial statements and related disclosures during the Class Period were 6 materially false and misleading due to the Company’s failure to properly disclose and account for 7 revenues and earnings it had obtained arising from improperly recognized advertising revenue via 8 click fraud and distribution fraud, described herein, and failed to timely and adequately accrue for 9 and disclose refunds it would have to grant to customers due to improperly recognized revenue. 10 Defendants knew that material amounts of Yahoo!’s marketing revenues, revenues attributed to 11 searches, and earnings per share were the result of click fraud and distribution fraud. Yet contrary to 12 accounting and SEC rules, Yahoo! failed to correctly account for and disclose this key aspect of its 13 earnings. These practices made Yahoo!’s reported operating results not indicative of the true nature 14 of Yahoo!’s underlying business nor of the business trends investors could expect based on those 15 results. Yahoo!’s failure to properly account for and disclose the impact of improperly recognized 16 revenue on its results was a violation of GAAP and SEC rules. 17 260. GAAP are those principles recognized by the accounting profession as the 18 conventions, rules and procedures necessary to define accepted accounting practice at a particular 19 time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the 20 SEC which are not prepared in compliance with GAAP are presumed to be misleading and 21 inaccurate, despite note or other disclosure. Regulation S-X requires that interim financial 22 statements must also comply with GAAP, with the exception that interim financial statements need 23 not include disclosure which would be duplicative of disclosures accompanying annual financial 24 statements. 17 C.F.R. §210.10-01(a). 25 261. Yahoo!’s key revenue, net income and earnings per share reported in its publicly filed 26 financial statements contained in its Form 10-Q’s and 10-K’s filed with the SEC for 1 Q 04 through 27 1Q 06 are set forth below: 28

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1 YAHOO! INC. Quarterly and Annual Results as Reported by YAHOO! 2 in thousands, except EPS (EPS is split-adjusted)

3 2004 4 31-Mar 30-Jun 30-Sep 31-Dec Year Total Revenues $757,786 $832,299 $906,715 $1,077,717 $3,574,517 5 Marketing Revenues $635,468 $690,634 $765,112 $1,036,015 $3,127,229 Net Income $101,212 $112,512 $253,305 $372,524 $839,553 6 Basic Earnings Per Share $0.08 $0.08 $0.19 $0.27 $0.62 7 2005 31-Mar 30-June 30-Sep 31-Dec Year 8 Total Revenues $1,173,742 $1,252,997 $1,329,929 $1,501,000 $5,257,668 Marketing Revenues $1,024,796 $1,094,301 $1,159,572 $1,315,303 $4,593,972 9 Net Income $204,560 $754,689 $253,773 $683,208 $1,896,230 Basic Earnings Per 10 Share $0.15 $0.54 $0.18 $0.48 $1.35 2006 11 31-Mar 12 Net Revenues $1,567,055 Marketing Revenues $1,380,854 13 Net Income $159,859 Basic Earnings Per 14 Share $0.11 262. Each of these figures for the periods in 2004, 2005 and 1 Q 06 were materially inflated 15 16 and false for the reasons set forth below.

Yahoo! Recorded Improper and Unearned Revenue in Violation of SEC SAB Topic 13: 17 Revenue Recognition 18 263. One of the most basic accounting tenets of GAAP is that an entity must actually 19 provide the actual product or service that entitles the entity to the revenue, before revenue can be 20 recognized: 21 “Revenues are not recognized until earned . . . revenues are considered earned 22 when the entity has substantially accomplished what it must do to be entitled to the 23 benefits represented by the revenues.” 24 See SEC SAB Topic 13A1.

25 264. Yahoo had not earned the incremental revenue associated with click fraud and 26 distribution fraud which was outside of the scope of its contract with its advertisers and violated this 27 28

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1 basic tenet of SAB Topic 13A1, because it had not provided a legitimate service to be entitled to the 2 benefits for that portion of the revenue. 3 265. Additionally, in determining whether revenue is realized or realizable and earned, 4 GAAP sets forth several of the fundamental criteria that must all be met. One of these criteria is that

5 “persuasive evidence that an arrangement exists with the customer” must exist. See SEC SAB Topic 6 13A1 and 13A2. In the case of click fraud and distribution fraud billings, such persuasive evidence 7 of an arrangement did not exist as these billings for click fraud were billings outside of the scope of 8 the contracts that Yahoo! had with its advertisers. That is, Yahoo!’s agreements with its advertisers 9 did not allow or permit fraudulent billings of clicks that Yahoo! saddled its customers with for the 10 sole purpose of recording additional fraudulent revenue that Yahoo! was not entitled to. 11 266. As a result of Yahoo!’s improper revenue recognition practices with respect to click 12 fraud and distribution fraud, Yahoo!’s revenues, net income and earnings per share were improperly 13 and materially inflated throughout the Class Period as detailed below.

14 Quantifications of Improper Revenue Recorded by Yahoo! Due to Click Fraud and Distribution Fraud During the Class Period 15 267. During the Class Period, Yahoo! reported at least $680 million in revenue attributed 16 to click fraud and distribution fraud, out of $3.165 billion in Sponsored Search revenue. This 17 minimum amount of false revenue is based on industry experts and analysts who have determined 18 that click fraud and distribution fraud amounts to at least 21.5% of all pay-per-click clicks. This 19 minimum amount of false revenue is corroborated by CW3 and CW6. 20 268. That 21.5% of Yahoo!’s pay-per-click revenue was improperly recognized has been 21 independently verified by Dr. Richard, Vice President and Lead Analyst for Outsell. Attached 22 hereto as Exhibit A is the Click Fraud Research report prepared by Outsell. A complete discussion 23 of Dr. Richard’s click fraud studies conducted in May and August 2006 is set forth supra ¶¶47-59. 24 269. Outsell’s conclusions that 21.5% of paid click revenue was improperly recognized are 25 corroborated by other sources which indicate that Outsell’s statistically based analysis is 26 conservative. For example, a March 10, 2005 article for Wired Magazine stated that businesses 27 28

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1 paying Google or Yahoo!’s Overture to appear as the No. 1 or No. 2 ad experience click fraud with 2 “as much as 35 percent of their traffic.”

3 270. During June 2005, Marketing Experiments Journal conducted research into the 4 amount of click fraud. It published the results of that research in an article on June 30, 2005, and 5 stated that: “Our research indicates that as much as 30% of paid search traffic may be fraudulent.”

6 271. A June 1, 2006 article in DIRECT magazine, entitled, “Sizing Up Click Fraud” 7 summarized that, “[s]ome monitoring firms have pegged the [click] fraud rate as high as 30% to

8 35% of all pay -per-click ad clicks.” This article also stated that a “December 2005 report by the 9 Search Engine Marketing Professional Organization found that 40% of online advertisers say 10 they’ve discovered fraud among their clicks, 16% more than the previous year.” The article also 11 discussed the efforts of “click auditing firm Click Forensics,” which found that “ fraud rates ran at 12 12.1 % of clicks on the top-tier search engines Google and Yahoo!, and 21.3% on second-tier 13 engines such as Ask.com and MSN Search.” 14 272. On July 17, 2006, Click Forensics issued a press release, “Industry Average Click 15 Fraud Rate Climbs in Second Quarter 2006.” The press release stated that “ [t]he overall industry 16 average click fraud rate was 14.1 percent, slightly higher than the average of 13.7 percent for 17 Q1.” They also found that “ Tier 1 search providers, such as Yahoo! and Google was 12.8 percent 18 vs. 12.1 percent in Q1.” Finally, Fair Isaac Corporation, a company with years of experience 19 detecting fraud, issued a press release on May 18, 2007, announcing preliminary results of its

20 research study into click fraud rates in pay-per-click advertising: “Early results indicate that 21 fraudulent clicks can amount to 10-15 percent of advertisers’ billed click traffic.” Even after a 22 search engine’s filters have purportedly removed all fraudulent clicks, 10%-15% of the advertiser’s

23 billed clicks are attributable to click fraud. These conclusions are not inconsistent with Outsell’s 24 study attached as Exhibit A hereto. In Outsell’s May 2006 study, Outsell concluded that the overall 25 click fraud average for all the 407 advertisers in that study, combining those who investigated, the 26 Analyticals, and those who did not investigate, the non-Analyticals was 14.6%. Outsell simply 27 concluded based on their research that advertisers actually using Yahoo!’s keyword and contextual 28

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1 ads and advertiser’s who actually analyzed their click logs provided convincing evidence of the 2 amount of improperly recognized advertising revenue by Yahoo!.

3 273. By falsely reporting Sponsored Search revenue to the tune of at least $680 million, 4 Yahoo! further misled the investing public into believing that Yahoo! attained at least an extra 49 5 cents in basic earnings per share during the Class Period. Moreover, Yahoo! falsely reported at least 6 three cents of basic earnings per share in each and every quarter of the Class Period, as shown in the 7 following charts:

8 Reported and Actual Revenues and EPS After Adjustments to Eliminate Improper Sponsored Search Revenue 9 1Q 04 2Q 04 3Q 04 4Q 04 10 Sponsored Search Revenue as Reported 210,000 228,000 252,000 342,000 21.5% of Sponsored Search is Improper 11 Revenue 45,150 49,020 54,180 73,530 Basic EPS as Reported $ 0.08 $ 0.08 $ 0.19 $ 0.27 12 Basic EPS Without Improper Revenue $ 0.04 $ 0.05 $ 0.15 $ 0.22 % of EPS Overstatement 50.00% 37.50% 21.05% 18.52% 13 1Q 05 2Q 05 3Q 05 4Q 05 14 Sponsored Search Revenue as Reported 359,000 383,000 406,000 460,000 21.5% of Sponsored Search is Improper 15 Revenue 77,185 82,345 87,290 98,900 Basic EPS as Reported $ 0.15 $ 0.54 $ 0.18 $ 0.48 16 Basic EPS without Improper Revenue $ 0.09 $ 0.48 $ 0.12 $ 0.41 17 % of EPS Overstatement 40.00% 11.11% 33.33% 14.58%

18 1Q 06 Sponsored Search Revenue as Reported 525,000 19 21.5% of Sponsored Search is Improper Revenue 112,875 20 Basic EPS as Reported $ 0.11 Basic EPS Without Improper Revenue $ 0.03 21 % of EPS Overstatement 72.73% 22 Class Period 23 FY 04 FY 05 1Q 06 Total Sponsored Search Revenue as Reported 1,032,000 1,608,000 525,000 3,165,000 24 21.5% of Sponsored Search is Improper Revenue 221,880 345,720 112,875 680,475 25 Basic EPS as Reported $ 0.62 $ 1.35 $ 0.11 $ 2.08 Basic EPS Without Improper Revenue $ 0.46 $ 1.10 $ 0.03 $ 1.59 26 % of EPS Overstatement 25.81% 18.52% 72.73% 23.56%

27 Numbers in 000s, except EPS and % of EPS Overstatement. Sources for reported figures: YHOO SEC Filings; Outsell Click Fraud Research Report, Ex. A hereto. 28

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1 274. Ultimately, Yahoo! has come under intense media scrutiny for fraudulent billing, has 2 admitted that its earnings following the Class Period were adversely impacted by reducing its 3 relationships with poor quality affiliates known to contribute to click fraud and distribution fraud, 4 has settled one click fraud lawsuit and is still in the midst of defending an on-going distribution fraud 5 lawsuit. In the distribution fraud lawsuit, a proposed class of advertisers who allege they were

6 improperly billed for pay-for-click advertising outside their proposed contracts, i.e., distribution 7 fraud, is seeking class certification to be decided in early 2009. Despite this media scrutiny and the 8 settlement and pendency of these lawsuits, Yahoo! has never fully disclosed the true amount of the 9 amount of revenue it recognized via click fraud and distribution fraud.

10 Yahoo!’s Inflated Revenue and EPS Were Material in Both Quantitative and Qualitative Respects 11 275. The U.S Securities and Exchange Commission’s Staff Accounting Bulletin No. 99, 12 Materiality, (“SAB 99”) details the concept of materiality and its application to public financial 13 statements under SAB 99. Yahoo!’s improper revenue recognition due to click fraud was material 14 both quantitatively and qualitatively. 15 276. As is clear from the table at ¶273 above, Yahoo!’s improper revenue recognition 16 related to click fraud and distribution fraud, was quantitatively material due to the sheer magnitude 17 of its impact on earnings per share. The smallest impact to earnings per share over the Class Period 18 was three cents and the largest impact to earnings per share was 8 cents and the percentage of EPS 19 overstatement ranged from 11% to 73%. Such overstatements in this range were quantitatively 20 material to Yahoo!’s investors. 21 277. Notwithstanding Yahoo!’s material overstatement of earnings per share, Yahoo!’s 22 artificially inflated revenues relating to click fraud were material as well. Yahoo!’s Sponsored 23 Search revenue accounted for 33%, 35% and 38% of its total marketing revenues (as disclosed in its 24 Form 10-Q’s and Form 10-K’s) in 2004, 2005, and 2006, respectively. Outsell’s analysis ( see Ex. 25 A), has shown that at least 21.5% of the Sponsored Search revenues were improper revenues 26 recorded by the means of click fraud. As a result, Yahoo!’s total marketing revenues were 27 improperly inflated by 7.1%, 7.5%, and 8.2% in 2004, 2005, and the 1Q 06, respectively. These 28

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1 percentages of artificially inflated revenue amounts were quantitatively material to Yahoo!’s 2 investors. 3 278. Notwithstanding the fact that Yahoo!’s improper revenue recognition due to click 4 fraud and distribution fraud was quantitatively material, it was also qualitatively material based on 5 the tenets of SAB 99. For instance, SAB 99 identifies certain considerations that render financial 6 statements to be misstated, even when the related amounts at issue are quantitatively small, if proper 7 disclosures are not made within the financial statements. These circumstances may include:

8 • whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in 9 the registrant’s operations and profitability 10 • whether the misstatement masks a change in earnings or other trends 11 • whether the misstatement hides a failure to meet analysts’ consensus 12 expectations for the enterprise

13 279. Yahoo!’s search business was a significant contributor to Yahoo!’s revenues and 14 income. It was also a business that was losing significant market share to Google during the Class 15 Period. Yahoo! knowingly recorded improper revenues from click fraud and distribution fraud to 16 help meet analyst expectations and mask the true reflection of its sagging revenues and income from 17 investors. Yahoo!’s investors were never told that a significant portion of Yahoo!’s business and 1 8 profitability was the result of improper revenues being recorded as the result of the click fraud. This 19 lack of a disclosure by Yahoo! was qualitatively material to its investors. 20 Yahoo!’s Failure to Accrue Liabilities for Obligations Arising from Click Fraud 21 280. By improperly billing and collecting fees from its advertising customers for

22 advertising that was outside the contract terms, Yahoo! incurred material contingent liabilities, 23 including refunds it would have to grant these advertising customers to reimburse them for the 24 fraudulently inflated ad bills they paid. GAAP, as set forth in FASB Statement of Financial 25 Accounting Concepts No. 5 (“Concepts No. 5”), requires an expense or loss to be recognized if it 26 becomes evident that previously recognized future economic benefits of an asset have been reduced

27 or eliminated, or that a liability has been incurred or increased, with associated benefits. See

28 Concepts No. 5, ¶87. Additionally, as set forth in Statement of Financial Accounting Standard

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1 (“SFAS”) No. 5, Accounting for Contingencies, an entity shall record a loss contingency when 2 information available prior to the issuance of the financial statements indicates (a) it is probable an 3 asset is impaired or a liability has occurred, and (b) the amount of loss can be reasonably estimated.

4 See SFAS No. 5, ¶8. 5 281. Because it was highly likely that Yahoo! would have to refund payments received 6 from advertising associated with the improper click fraud billings, this contingent liability should 7 have been recorded by Yahoo! during the Class Period. However, Yahoo! did not adequately accrue 8 a loss for the contingent liability associated with paying out refunds which were likely to be incurred 9 when the click fraud was exposed. This liability clearly existed, as Yahoo! has settled one class 10 action click fraud suit and paid an undisclosed amount of refunds and credits to its advertising 11 customers to account for these material unaccrued-for liabilities for click fraud and is currently 12 defending the distribution fraud suit by advertisers alleging they were improperly charged for clicks 13 generated via spyware, poor quality affiliates and low quality products such as Content Match and 14 Domain Match.

15 282. As a result of Yahoo!’s knowing participation in the click fraud and corresponding 16 failure to accrue for these refunds to its customers, Yahoo! inflated net income on its income 17 statement and understated liabilities on its balance sheet throughout the Class Period.

18 Yahoo! Failed to Make Required Disclosures About the Impact of Click Fraud on Its Results 19 283. Given the significance of advertising revenues to Yahoo!’s reported financial results, 20 the level of click fraud, and the corresponding impact on earnings, Yahoo! was required by GAAP 21 and SEC rules to disclose its practice of billing customers for revenue outside the contracts and 22 disclose the quantified impact of these revenues to Yahoo!’s business. Further, given the uncertainty 23 of how long this practice could continue, investors were denied a full picture of Yahoo!’s financial 24 statements and the predictive value of the financial statements by Yahoo!’s concealment of the 25 impact of the click fraud and failure to disclose the practice. 26 284. In April 2006, Harvard researcher Ben Edelman disseminated his research, which 27 provided some clarity to the different types of click fraud and distribution fraud at Yahoo!. His 28

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1 research indicated that some spyware programs actually simulate the click itself – with the result that 2 advertisers may have been paying Yahoo! for fake clicks. Edelman stated in part:

3 I see six distinct problems with the Yahoo practices and partners at issue.

4 Click fraud. Through these improper ad displays, Yahoo charges advertisers for “clicks” that didn’t actually occur. This violates the core premise of pay-per-click 5 advertising, i.e. that an advertiser only pays if a user affirmatively shows interest in the advertiser’s ad. Yahoo promises: “Pay only when a customer clicks on your 6 listing.” But that’s just not true here. Instead, through click fraud, advertisers are asked to pay for spyware-delivered traffic, whether or not users actually click. 7 Untargeted traffic. Premium prices for PPC advertising reflect, in part, the 8 extreme targeting of PPC leads: PPC ads are only supposed to be shown to users actively searching for the specified product, service, or term. Yahoo promises: 9 “Advertise only to customers who are already interested in your products or services.” That’s also untrue in some of my examples. [I]n fact spyware-delivered 10 PPC results show Yahoo PPC ads to users with no interest in advertisers’ products or services. 11 Self-targeting traffic. Spyware-delivered PPC ads often target advertisers 12 with their own ads. For example, in August I reported a user browsing the Dell site, then receiving spyware-delivered Yahoo PPC advertising promising “up to 1/3 off” if 13 a user clicked a prominent link. But clicking that link didn’t actually provide any discounts or savings beyond Dell’s usual prices. However, each time a user clicked 14 the link, Dell had to pay Yahoo a PPC advertising fee that I estimate at $3.30. That’s a bad deal for Dell: These users were already at Dell’s site, and there’s no reason 15 why Dell should pay Yahoo or a spyware vendor just to keep them there. Same for self-targeting of SmartBargains, reported above. 16 Failure to label sponsored links as such. Through spyware syndication, 17 Yahoo PPC ads often appear on users’ screens without appropriate labeling. When unlabeled ads appear in or adjacent to search engine results, these ads risk violating 18 the FTC’s 2002 instructions for advertising disclosures at search engines. See my prior SideFind example, where SideFind justifies bona fide search results with Yahoo 19 PPC ads, without labeling Yahoo’s ads as such. Unlabeled ads also prevent users from understanding the nature of the linked content: For example, recall my 20 Qklinkserver example. Seeing unlabeled text links inserted into ordinary web pages, users reasonably expect that such links were chosen by the sites users were visiting, 21 when in fact such links were unilaterally inserted by unrelated spyware installed without user consent. 22 Low-quality traffic. Advertisers pay Yahoo a premium to reach desirable 23 users at Yahoo.com – sophisticated users, users who are actively engaged in search. In contrast, spyware sends advertisers low-quality users, including users who are less 24 likely to make a purchase. This traffic is not worth the premium price Yahoo charges. Consider: 180solutions sells popups for as little as $0.015 (one and a half cents) per 25 ad display. In contrast, Yahoo charges a minimum of $0.10 – more than six times as much. Yahoo harms advertisers when Yahoo charges advertisers its premium prices 26 for ads ultimately shown through low-quality low-cost channels like 180solutions.

27 Unethical spyware-sourced traffic. Industry norms, litigation, and instructions from policy makers (1, 2) all tell advertisers to keep their ads out of 28 spyware. Discomfort with spyware reflects concerns about installation methods

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1 (misleading and nonconsensual installations), privacy effects, other harms to consumers, and harms to other web sites. For these and other reasons, many 2 advertisers make a serious good-faith effort to stay away from spyware. These same advertisers also buy PPC ads from Yahoo – a standard, reasonable practice for 3 anyone buying online advertising. Unfortunately, these Yahoo PPC ad purchases inevitably and automatically put advertisers into notorious spyware, including the 4 programs reported above. By allowing these improper ad placements, Yahoo endangers its advertisers’ good names, and risks putting them in violation of best 5 practices and policy-makers’ guidance. 6 285. As a result of this, the subsequent resolution of litigation and the increasing attention 7 paid to click fraud and distribution fraud, Yahoo! was increasingly unable to continue its recognition 8 of income from click fraud, adversely affecting its future results. 9 286. The SEC requires that, as to annual and interim financial statements filed with the 10 SEC, registrants include a management’s discussion and analysis section which provides information 11 with respect to the results of operations and “also shall provide such other information that the 12 registrant believes to be necessary to an understanding of its financial condition, changes in financial

13 condition and results of operations.” See Regulation S-K, 17 C.F.R. §229.303(a). Regulation S-K 14 states that, as to annual results, the management’s discussion and analysis section shall:

15 (3) Results of Operations. 16 (i) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income 17 from continuing operations and, in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues 18 or expenses that, in the registrant’s judgment, should be described in order to understand the registrant’s results of operations. 19 (ii) Describe any known trends or uncertainties that have had or that the 20 registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows 21 of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price 22 increases or inventory adjustments), the change in the relationship shall be disclosed. 23 287. The SEC also requires that interim period financial statements filed with the SEC 24 include a management’s discussion and analysis of the financial condition and results of operations

25 so as to enable the reader to assess material changes in financial condition and results of operations. 26 Regulation S-K, 17 C.F.R. §229.303(b), states that: “The discussion and analysis shall include a 27 discussion of material changes in those items specifically listed in paragraph (a) of this Item [as set 28

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1 forth above], except that the impact of inflation and changing prices on operations for interim 2 periods need not be addressed.” As one court noted: 3 Item 303(a)(3)(ii) essentially says to a registrant: If there has been an important change in your company’s business or environment that significantly or 4 materially decreases the predictive value of your reported results, explain this change in the prospectus. The obvious focus is on preventing the latest reported results from 5 misleading potential investors, thereby promoting a more accurate picture of the registrant’s future prospects. 6 See Oxford Asset Mgmt. v. Jaharis, 297 F.3d 1182, 1192 (11th Cir. 2002). 7 288. Based on the SEC’s rules and regulations, during the Class Period, Yahoo! failed to 8 truthfully and adequately disclose the impact of click fraud on its financial results. 9 289. Moreover, GAAP requires that financial information be useful to potential investors 10 and creditors. GAAP, as described by Concepts No. 1, ¶37, states: 11 Financial reporting should provide information to help present and potential 12 investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds 13 from the sale, redemption, or maturity of securities or loans. . . . Thus, financial reporting should provide information to help investors, creditors, and others assess 14 the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. 15 290. Due to these accounting improprieties, the Company presented its financial results 16 and statements in a manner which violated GAAP, including the following fundamental accounting 17 principles: 18 (a) The principle that “financial reporting should provide information about how 19 management of an enterprise has discharged its stewardship responsibility to owners (stockholders) 20 for the use of enterprise resources entrusted to it” was violated. To the extent that management 21 offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for 22 accountability to prospective investors and to the public in general (Concepts No. 1, ¶50); 23 (b) The principle that “financial reporting should provide information about an 24 enterprise’s financial performance during a period” was violated. Investors and creditors often use 25 information about the past to help in assessing the prospects of an enterprise. Thus, although 26 investment and credit decisions reflect investors’ expectations about future enterprise performance, 27 28

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1 those expectations are commonly based at least partly on evaluations of past enterprise performance 2 (Concepts No. 1, ¶42);

3 (c) The principle that financial reporting should be reliable in that it represents 4 what it purports to represent was violated. “That information should be reliable as well as relevant is 5 a notion that is central to accounting” (Concepts No. 2, ¶¶58-59);

6 (d) The principle of completeness, which means that nothing is left out of the 7 information that may be necessary to insure that it validly represents underlying events and 8 conditions was violated (Concepts No. 2, ¶79); and

9 (e) The principle that conservatism be used as a prudent reaction to uncertainty to 10 try to ensure that uncertainties and risks inherent in business situations are adequately considered 11 was violated. The best way to avoid injury to investors is to try to ensure that what is reported 12 represents what it purports to represent (Concepts No. 2, ¶¶95, 97).

13 291. Further, the undisclosed adverse information concealed by defendants during the 14 Class Period is the type of information which, because of SEC regulations, regulations of the 15 national stock exchanges and customary business practice, is expected by investors and securities 16 analysts to be disclosed and is known by corporate officials and their legal and financial advisors to 17 be the type of information which is expected to be and must be disclosed.

18 Defendants Certified False and Misleading Financial Results 19 292. Defendants Semel and Decker knowingly certified false and misleading financial 20 statements. Defendants Semel and Decker certified the following financial statements during the 21 Class Period: 22

23 24

25 26 27 28

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1 SCHEDULE OF CERTIFIED FINANCIAL STATEMENTS Financial Statement Filing Filing Signed/Certified by 2 Filed Period Date CEO CFO Form 10-Q March 31, 2004 May 7, 2004 Terry Semel Susan Decker 3 Form 10-Q June 30, 2004 Aug. 9, 2004 Terry Semel Susan Decker Form 10-Q Sept. 30, 2004 Oct. 29, 2004 Terry Semel Susan Decker 4 Form 10-K Dec. 31, 2004 March 11, 2005 Terry Semel Susan Decker Form 10-Q March 31, 2005 May 6, 2005 Terry Semel Susan Decker 5 Form 10-Q June 30, 2005 Aug. 5, 2005 Terry Semel Susan Decker Form 10-Q Sept. 30, 2005 Nov. 4,2005 Terry Semel Susan Decker 6 Form 10-K Dec. 31, 2005 March 3, 2006 Terry Semel Susan Decker Form 10-Q March 31, 2006 May 5, 2006 Terry Semel Susan Decker 7 8 These financial statements were not in accordance with GAAP and SEC rules.

9 293. Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rules 13a-14(a) and 15d- 10 14(a) of the 1934 Act required defendants Semel, as CEO, and Decker, as CFO, to certify each 11 quarterly and annual report to both the SEC and investors as follows:

12 I, Terry Semel, the Chief Executive Officer / Susan Decker, the Chief Financial Officer of Yahoo! Inc., certify that: 13 1. I have reviewed this annual report on Form 10-K / quarterly report on 14 Form 10-Q of Yahoo! Inc.; 15 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the 16 statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 17 3. Based on my knowledge, the financial statements, and other financial 18 information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the 19 periods presented in this annual report; 20 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in 21 Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the 22 registrant and have: 23 (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to 24 ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during 25 the period in which this annual report is being prepared; 26 (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our 27 supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in 28 accordance with generally accepted accounting principles;

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1 (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the 2 effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 3 (d) Disclosed in this report any change in the registrant’s internal 4 control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has 5 materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 6 5. The registrant’s other certifying officer and I have disclosed, based on 7 our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or 8 persons performing the equivalent functions): 9 (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably 10 likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 11 (b) Any fraud, whether or not material, that involves management 12 or other employees who have a significant role in the registrant’s internal control over financial reporting. 13 294. At the time defendants Semel and Decker signed these certifications, they knew or 14 recklessly disregarded that they were false for the reasons alleged herein. 15 295. Additionally, on the dates noted in the Schedule of Certified Financial Statements 16 above, defendants Semel and Decker signed and filed with the SEC certifications under SEC Rules 17 13a-14(a) and 15d-14(a) of the 1934 Act and §906 of Sarbanes-Oxley attesting to the accuracy and 18 truthfulness of the corresponding Forms 10-K and 10-Q for Yahoo!. At the time defendants Semel 19 and Decker signed these certifications, they knew or recklessly disregarded that they were false for 20 the reasons alleged herein. 21 PROXIMATE LOSS CAUSATION/ECONOMIC LOSS 22 296. During the Class Period, as detailed herein, defendants engaged in a scheme to 23 deceive investors and the market and a course of conduct that artificially inflated Yahoo!’s stock 24 price and operated as a fraud or deceit on Class Period purchasers of Yahoo! stock by 25 misrepresenting the following: the integration of Overture, the poor performance of Yahoo!’s search 26 products including Content Match and Domain Match, the completion of Panama, the volume of 27 click fraud, the poor quality of third-party affiliates and YPN partners and the Company’s financial 28

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1 results by improperly recognizing advertising revenue. Defendants achieved the façade that Yahoo! 2 was able to compete with Google and grow its paid search business by misrepresenting Yahoo!’s 3 paid search products and development of the Company’s new advertising platform, Project Panama. 4 Defendants were able to portray Yahoo! as achieving strong search revenue growth over nine 5 consecutive quarters by improperly inflating Yahoo!’s reported Search Marketing Revenue by more 6 than $680 million. Later, however, when defendants’ prior misrepresentations and fraudulent

7 conduct was disclosed and it became apparent to the market that defendants’ statements about the 8 development of Project Panama were false and the Company had improperly included unearned 9 revenue from low quality affiliates in paid search revenue, Yahoo! stock fell precipitously as the 10 prior artificial inflation created by defendants’ false and misleading statements to the market, came 11 out of Yahoo!’s stock price. As a result of their purchases of Yahoo! stock during the Class Period,

12 Lead Plaintiffs and other members of the Class suffered economic loss, i.e., damages, under the 13 federal securities laws. 14 297. By improperly reporting click fraud revenues in its Search Marketing Revenues – a

15 key factor in evaluating Yahoo!’s financial health and success – the defendants presented a 16 misleading picture of Yahoo!’s business. Thus, instead of truthfully disclosing during the Class 17 Period that Yahoo!’s track record of growth and business success was fading and that Yahoo! was 18 losing further ground to Google, defendants caused Yahoo! to falsely report growth rates in Search 19 Marketing Revenue as evidence of Yahoo!’s thriving search market advertising business.

20 Defendants also misrepresented the realization of their search monetization efforts (Panama). 21 298. Defendants’ false and misleading statements had the intended effect and caused 22 Yahoo! stock to trade at artificially inflated levels up to $43.66 per share throughout the Class 23 Period. 24 299. Beginning January 18, 2006 and continuing through July 18, 2006, defendants were 25 forced to publicly disclose that:

26 (a) Yahoo! was delaying implementation of Panama which was essential to 27 maintain revenues and necessary for Yahoo! to compete with Google in the search marketing arena; 28 and

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1 (b) Yahoo!’s revenues were not growing as fast due to its being forced to 2 terminate relationships with its third-party affiliate websites who were contributing to click fraud.

3 300. As a direct result of defendants’ public revelations regarding the truth about Yahoo!’s 4 search marketing business and its partial disclosure about the delay in Panama, Yahoo!’s stock price 5 plummeted over 12%, on five times normal trading volume on January 18, 2006. Yahoo!’s stock 6 also declined 21 % on July 19, 2006 on ten times normal trading volume when defendants announced 7 Panama was delayed once again, and search revenues were declining due to Yahoo! terminating 8 relationships with bad third-party affiliate websites engaged in click fraud. These drops removed the 9 inflation from Yahoo!’s stock price, causing real economic loss to investors who had purchased the 10 stock during the Class Period. Analysts following the Company were shocked by these adverse 11 revelations. 12 301. With respect to the January 18, 2006 partial disclosure that Panama was delayed, an 13 Oppenheimer analyst report dated January 18, 2006, stated, “[w]e view this delay as a negative for 14 the company as Google . . . continues to gain relative share.” A Stanford Group report issued the 15 same day stated, “Yahoo management indicated that monetization gains in its search business 16 could take longer to realize than we had anticipated.” Bear Stearns analysts stated in a January 18, 17 2006 report: “Concerns [–] Yahoo has a relatively weak market position in search. Yahoo!’s

18 monetization efforts lags Google and translates into weaker revenue in this segment. Benefits from 19 improvements in monetization may impact revenues later that [sic] the market perceives.”

20 Regarding the announcement of the Panama delay on July 18, 2006, analyst Safa Rashtchy stated, 21 “‘I find it troubling’” that they gave a “‘nonanswer’” to explain they delay. “Panamawful” stated a 22 RBC report with “[m]anagement loses some credibility due to the delay.” Another analyst (Pacific

23 Crest) stated Panama was “the company’s most material project” and the delay was “disappointing.” 24 The July 18th revenue shortfall was also criticized. The disappointing Panama delay news “was 25 amplified by Q2’s weaker than expected search results” stated a Bear Stearns analyst with “[s]earch 26 was relatively weak” and “disappointing revenue per search.” A CIBC analyst report stated 27 “Reducing Outlook on Delays in New Platform Launch & Slowing Rev/Search Growth” with

28

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1 “disappointing search monetization and revenue per search were responsible for the weakness in US 2 revenues.”

3 302. Regarding the July 18, 2006 acknowledgement that Yahoo! was terminating bad 4 third-party affiliates that generated improper revenue from click fraud and in response to an analyst 5 question about cutting off “poor traffic affiliates” hurting revenue growth, defendant Decker

6 admitted on the July 18, 2006 conference call that “the total effect on our rev[enue] ex-TAC took 7 about 2 points off of our overall growth” and “[w]e expect that roughly 200 basis points impact to 8 continue for the back half.” A July 19, 2006 Deutsche Bank report believed part of the shortfall was 9 due to click fraud: “The rising concerns over click fraud . . . prompted the move to terminate low 10 quality traffic relationships in Yahoo!’s search business.” Analysts all recognized the negative

11 impact on revenue that was a result of Yahoo! terminating its relationship with bad third-party

12 affiliates. See ¶¶177-182, 190. After July 2006, Yahoo! continued to report disappointing earnings 13 because of Yahoo!’s decreasing reliance on poor quality affiliates. For 3Q 06, 4Q 06, FY 07 and 1 Q 14 07, Yahoo! was forced to report lower paid search revenue under analyst expectations because of

15 traffic quality improvements. See ¶¶180-181, 186, 189-190. Ultimately, Yahoo! was forced to 16 announce a new pricing model where prices were cheaper for lower quality affiliates. ¶191. In sum, 17 as the truth about Yahoo!’s actual financial business performance was revealed, the Company’s 18 stock price plummeted, the artificial inflation came out of the stock and Lead Plaintiffs and other 19 members of the Class were damaged, suffering economic losses.

20 303. The decline in Yahoo!’s stock price at the end of the Class Period was a direct result 21 of the nature and extent of defendants’ prior misstatements and fraudulent conduct finally being 22 revealed to investors and the market. The timing and magnitude of Yahoo!’s stock price declines 23 negate any inference that the loss suffered by Lead Plaintiffs and other Class members was caused 24 by changed market conditions, macroeconomic or industry factors or Company-specific facts 25 unrelated to the defendants’ fraudulent conduct. On January 18, 2006, Yahoo!’s stock price declined 26 12.29% while the S&P index declined less than a half percent and the Goldman Sachs Internet index 27 declined 2.39%. On July 19, 2006, Yahoo!’s stock price declined 21.83%, while the S&P increased 28 1.8% and the Goldman Sachs index declined less than 1 %. Thus, the specific disclosures by Yahoo!

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1 on these two dates, (with the January 18th date being a partial disclosure) removed inflation from

2 Yahoo!’s stock price due to Company-specific disclosures. The economic loss, i.e., damages, 3 suffered by Lead Plaintiffs and other members of the Class, was a direct result of defendants’ 4 fraudulent scheme to artificially inflate Yahoo!’s stock price and the subsequent significant decline 5 in the value of Yahoo!’s stock when defendants’ prior misrepresentations and other fraudulent

6 conduct was revealed through the true business conditions of the Company ( i.e., loss causation).

7 APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE 8 304. At all relevant times, the market for Yahoo!’s securities was an efficient market for 9 the following reasons, among others: 10 (a) Yahoo!’s stock met the requirements for listing, and was listed and actively 11 traded on the NASDAQ, a highly efficient and automated market; 12 (b) As a regulated issuer, Yahoo! filed periodic public reports with the SEC and 13 the NYSE; 14 (c) Yahoo! regularly communicated with public investors via established market 15 communication mechanisms, including through regular disseminations of press releases on the 16 national circuits of major newswire services and through other wide-ranging public disclosures, such 17 as communications with the financial press and other similar reporting services; and 18 (d) Yahoo! was followed by numerous securities analysts employed by major 19 brokerage firms who wrote reports, which were distributed to the sales force and certain customers 20 of their respective brokerage firms. Each of those reports was publicly available and entered the 21 public marketplace. 22 305. As a result of the foregoing, the market for Yahoo!’s securities promptly digested 23 current information regarding Yahoo! from all publicly available sources and reflected such 24 information in Yahoo!’s stock price. Under these circumstances, all purchasers of Yahoo!’s 25 common stock during the Class Period suffered similar injury through their purchase of Yahoo!’s 26 common stock at artificially inflated prices and a presumption of reliance applies. 27 28

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1 NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS 2 306. The statutory safe harbor provided for forward-looking statements under certain 3 circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The 4 specific statements pleaded herein either were not identified as “forward-looking statements” when

5 made or were not accompanied by meaningful cautionary statements identifying important factors 6 that could cause actual results to differ materially from those in the purportedly forward-looking 7 statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward- 8 looking statements pleaded herein, defendants are liable for those false forward-looking statements 9 because at the time each of those forward-looking statements was made, the particular speaker knew 10 that the particular forward-looking statement was false, and/or the forward-looking statement was 11 authorized and/or approved by an executive officer of Yahoo! who knew that those statements were 12 false when made.

13 LEAD PLAINTIFFS’ CLASS ACTION ALLEGATIONS 14 307. Lead Plaintiffs bring this action as a class action pursuant to Fed. R. Civ. P. 23 (a) and 15 (b)(3) on behalf of a class consisting of purchasers of Yahoo!’s publicly traded securities during the 16 Class Period who were damaged by defendants’ fraud (the “Class”). Excluded from the Class are 17 defendants, the officers and directors of the Company, members of their immediate families and 18 their legal representatives, heirs, successors or assigns and any entity in which defendants have or 19 had a controlling interest.

20 308. The members of the Class are so numerous that joinder of all members is 21 impracticable. Throughout the Class Period, Yahoo!’s common stock was actively traded on the 22 NASDAQ. While the exact number of Class members is unknown to Lead Plaintiffs at this time and 23 can only be ascertained through appropriate discovery, Lead Plaintiffs believe that there are 24 thousands of members in the proposed Class. Record owners and other members of the Class may 25 be identified from records maintained by Yahoo! or its transfer agent and may be notified of the 26 pendency of this action by mail, using the form of notice similar to that customarily used in 27 securities class actions. 28

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1 309. Lead Plaintiffs’ claims are typical of the claims of the members of the Class as all 2 members of the Class were similarly affected by defendants’ wrongful conduct in violation of 3 federal law that is complained of herein. 4 310. Lead Plaintiffs will fairly and adequately protect the interests of the members of the 5 Class and have retained counsel competent and experienced in class action and securities litigation.

6 311. Common questions of law and fact exist as to all members of the Class and 7 predominate over any questions solely affecting individual members of the Class. Among the 8 questions of law and fact common to the Class are:

9 (a) Whether the federal securities laws were violated by defendants’ acts as 10 alleged herein;

11 (b) Whether statements made by defendants to the investing public during the 12 Class Period misrepresented and omitted material facts about the business, operations and financial 13 results of Yahoo!; and

14 (c) To what extent the members of the Class have sustained damages and the 15 proper measure of damages.

16 312. A class action is superior to all other available methods for the fair and efficient 17 adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the 18 damages suffered by individual Class members may be relatively small, the expense and burden of 19 individual litigation make it impossible for members of the Class to individually redress the wrongs

20 done to them. There will be no difficulty in the management of this action as a class action.

21 COUNT I 22 Violation of §10(b) of the 1934 Act and Rule 10b-5 Promulgated Thereunder Against All Defendants 23 313. Lead Plaintiffs repeat and reallege each and every allegation contained above as if 24 fully set forth herein. 25 314. During the Class Period, defendants, and each of them, carried out a plan, scheme and 26 course of conduct which was intended to and, throughout the Class Period, did: (a) deceive the 27 investing public, including Lead Plaintiffs and other Class members, as alleged herein; (b) artificially 28

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1 inflate and maintain the market price of Yahoo!’s securities; and (c) cause Lead Plaintiffs and other 2 members of the Class to purchase Yahoo!’s securities at artificially inflated prices and, as a result, 3 suffer economic losses when the truth about defendants’ fraud was revealed. In furtherance of this 4 unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set 5 forth herein.

6 315. Defendants: (a) employed devices, schemes and artifices to defraud; (b) made untrue 7 statements of material fact and/or omitted to state material facts necessary to make the statements not 8 misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud and 9 deceit upon the purchasers of the Company’s securities in an effort to maintain artificially high

10 market prices for Yahoo!’s securities in violation of §10(b) of the 1934 Act and Rule 1 0b-5. All

11 defendants are sued either as primary participants in the wrongful and illegal conduct charged herein 12 or as controlling persons as alleged below. 13 316. In addition to the duties of full disclosure imposed on defendants as a result of their 14 making of affirmative statements and reports, or participation in the making of affirmative

15 statements and reports to the investing public, defendants had a duty to promptly disseminate truthful 16 information that would be material to investors in compliance with the integrated disclosure

17 provisions of the SEC as embodied in SEC Regulation S-X, 17 C.F.R. §§210.01, et. seq., and

18 Regulation S-K, 17 C.F.R. §§229.10, et. seq., and other SEC regulations, including accurate and 19 truthful information with respect to the Company’s operations, financial condition, revenue and

20 earnings so that the market price of the Company’s securities would be based on truthful, complete 21 and accurate information. 22 317. Defendants, individually and in concert, directly and indirectly, by the use, means or 23 instrumentalities of interstate commerce and/or of the mails, engaged and participated in a 24 continuous course of conduct to conceal adverse material information about the business, operations 25 and future prospects of Yahoo! as specified herein. 26 318. These defendants employed devices, schemes and artifices to defraud, while in 27 possession of material adverse non-public information and engaged in acts, practices and a course of 28 conduct as alleged herein in an effort to assure investors of Yahoo!’s value and performance and

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1 continued substantial growth, which included the making of, or the participation in the making of,

2 untrue statements of material facts and omitting to state material facts necessary in order to make the 3 statements made about Yahoo! and its business operations and future prospects in the light of the 4 circumstances under which they were made, not misleading, as set forth more particularly herein, 5 and engaged in transactions, practices and a course of business which operated as a fraud and deceit 6 upon the purchasers of Yahoo!’s securities during the Class Period. 7 319. The Individual Defendants’ primary liability, and controlling person liability, arises 8 from the following facts: (a) the Individual Defendants were high-level executives and directors at 9 the Company during the Class Period; (b) the Individual Defendants were privy to and participated 10 in the creation, development and reporting of the Company’s internal budgets, plans, projections 11 and/or reports; and (c) the Individual Defendants were aware of the Company’s dissemination of 12 information to the investing public which they knew or recklessly disregarded was materially false 13 and misleading.

14 320. The defendants had actual knowledge of the misrepresentations and omissions of 15 material facts set forth herein, or acted with reckless disregard for the truth in that they failed to 16 ascertain and to disclose such facts, even though such facts were available to them. Such 17 defendants’ material misrepresentations and omissions were done knowingly or recklessly and for

18 the purpose and effect of concealing Yahoo!’s financial results, operating condition and business 19 prospects from the investing public and supporting the artificially inflated price of its securities. As 20 demonstrated by defendants’ misstatements and omissions regarding the Company’s financial results

21 and operations throughout the Class Period, defendants, if they did not have actual knowledge of the 22 misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by 23 deliberately refraining from taking those steps necessary to discover whether those statements were 24 false or misleading.

25 321. As a result of the dissemination of the materially false and misleading information 26 and failure to disclose material facts, as set forth above, the market price of Yahoo!’s securities was 27 artificially inflated during the Class Period. In ignorance of the fact that market prices of Yahoo!’s 28 publicly traded securities were artificially inflated, and relying directly or indirectly on the false and

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1 misleading statements made by defendants, or upon the integrity of the market in which the 2 securities trade and/or on the absence of material adverse information that was known to or 3 recklessly disregarded by defendants, but not disclosed in public statements by defendants during the 4 Class Period, Lead Plaintiffs and the other members of the Class acquired Yahoo! securities during 5 the Class Period at artificially inflated prices and were damaged thereby.

6 322. At the time of said misrepresentations and omissions, Lead Plaintiffs and other 7 members of the Class were ignorant of their falsity, and believed them to be true. Had Lead 8 Plaintiffs and the other members of the Class and the marketplace known of the true financial 9 condition and business prospects of Yahoo!, which were not disclosed by defendants, Lead Plaintiffs 10 and other members of the Class would not have purchased or otherwise acquired their Yahoo! 11 securities, or, if they had acquired such securities during the Class Period, they would not have done 12 so at the artificially inflated prices which they paid.

13 323. By virtue of the foregoing, defendants have violated § 10(b) of the 1934 Act, and Rule 14 1 0b-5 promulgated thereunder.

15 324. As a direct and proximate result of defendants’ wrongful conduct, Lead Plaintiffs and 16 the other members of the Class suffered damages in connection with their respective purchases and 17 sales of the Company’s securities during the Class Period.

18 COUNT II 19 Violation of §20(a) of the 1934 Act Against All Defendants 20 325. Lead Plaintiffs repeat and reallege each and every allegation contained above as if 21 fully set forth herein. 22 326. The Individual Defendants acted as controlling persons of Yahoo! within the meaning 23 of §20(a) of the 1934 Act as alleged herein. Yahoo! controlled all of its employees and each of the 24 Individual Defendants. By virtue of their high-level positions, and their ownership and contractual 25 rights, participation in and awareness of the Company’s operations and intimate knowledge of the 26 statements filed by the Company with the SEC and disseminated to the investing public, the 27 Individual Defendants had the power to influence and control and did influence and control, directly 28

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1 or indirectly, the decision-making of the Company, including the content and dissemination of the 2 various statements which Lead Plaintiffs contend are false and misleading. The Individual 3 Defendants were provided with or had unlimited access to copies of the Company’s reports, press 4 releases, public filings and other statements alleged by Lead Plaintiffs to be misleading prior to 5 and/or shortly after these statements were issued and had the ability to prevent the issuance of the 6 statements or cause the statements to be corrected.

7 327. In particular, the Individual Defendants had direct and supervisory involvement in the 8 day-to-day operations of the Company and, therefore, are presumed to have had the power to control 9 or influence the particular transactions giving rise to the securities violations as alleged herein, and 10 exercised the same. 11 328. As set forth above, Yahoo! and the Individual Defendants each violated § 10(b) and 12 Rule 1 0b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as 13 controlling persons, the! defendants are liable pursuant to §20(a) of the 1934 Act. As a direct and 14 proximate result of these defendants’ wrongful conduct, Lead Plaintiffs and other members of the

15 Class suffered damages in connection with their purchases of the Company’s securities during the 16 Class Period.

17 COUNT III 18 Insider Trading Under §20A of the 1934 Act Against the Individual Defendants 19 329. Plaintiffs repeat and reallege each of the allegations set forth in the foregoing 20 paragraphs. 21 330. This claim is asserted by plaintiffs under §20A of the 1934 Act against the Individual 22 Defendants, on behalf of all persons who purchased Yahoo! common stock contemporaneously with 23 the sale of Yahoo! common stock by these defendants. 24 331. During the Class Period, each of the Individual Defendants occupied a position with 25 Yahoo! which made him or her privy to confidential information concerning the Company, its 26 operations, finances, financial condition and future business prospects, including, but not limited to, 27 the material adverse information concerning click fraud and Panama set forth herein. 28

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1 332. Notwithstanding their duty to refrain from trading in Yahoo! common stock unless

2 they disclosed the foregoing material adverse facts, and in violation of their fiduciary duties to 3 plaintiffs and other members of the Class, the Individual Defendants sold in the aggregate millions 4 of dollars worth of Yahoo! common stock during the Class Period contemporaneously with 5 plaintiffs’ and other Class members’ purchases of Yahoo! common stock.

6 333. The Individual Defendants sold their shares of Yahoo! common stock, as alleged 7 above, at market prices artificially inflated by the nondisclosure and misrepresentations of material 8 adverse facts in the public statements released during the Class Period. 9 334. Sales that were made by the Individual Defendants contemporaneously with Yahoo! 10 common stock purchases by at least one or more of the Lead Plaintiffs or plaintiff members of the 11 Class are set forth in the following chart: 12 Shares Share Total 13 Purchaser Date Purchased Price Cast Pompano Beach Police & Firefighters' Retirement System a September 1, 2004 40 $ 28.93 $ 1,15T_20 14 Pension Trust Fund for Operating Engineers November 1, 20046 31,5006 $ 36.20 a $ 1.140,350.40 Pension Trust Fund for Operating Engineers a May 2, 2005 24,200 $ 34.80 $ 842,239.86 Pompano Beach Police & Firefighters' Retirement System October 28, 2005 6 20,5006 $ 35-46 a $ 726.858-25 15 Pension Trust Fund for Operating Engineers a November 1, 2005 116,777 $ 35.45$ 4,139,195.80 Pension Trust Fund for Operating Engineers November 2, 2005 6 5,3856 $ 35.45 a $ 190,923.02 16 Pension Trust Fund for Operating Engineers February 15, 2006 1,000 $ 32.25 $ 32,253.20 17 Shares Average Total 18 Inside Seller Date Sold Price Proceeds Rosensweig a September 1, 2004 a 76,000a $ 28.22 a $ 2,145,000.00 19 NaremNovember 1, 2004 100,000 $ 36.95 $ 3,695,000.00 20 Rosensweig a November 1, 20046 76,0006 $ 36.27 a $ 2,756,830.00 21 Rosensweig May 2. 2005 76,000 $ 34.42 $ 2,615.582.00 Semel October 28, 2005 500,000 $ 35.60 $17,799,384.00 22 Nazem November 1, 2005 111,052 $ 38.09 $ 4,230,263.00 23 Rosensweig November 1, 2005 0- 76,000.$ 36.94 o- $ 2,807,440.00

24 Becker November 2, 2005 104,167. $ 38.01 $ 3,959,753.00 25 Semel February 15, 2006 400,000 $ 33.18 $13.273,719.00

26 335. The Individual Defendants knew that they were in possession of material adverse 27 information which was not known to the investing public, including plaintiffs and other members of 28

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1 the Class. Before selling their stock to the public, they were obligated to disclose that information to 2 plaintiffs and other members of the Class.

3 336. By reason of the foregoing, the Individual Defendants, directly and indirectly, by use 4 of the means and instrumentalities of interstate commerce, the mails, and the facilities of the national 5 securities exchanges, employed devices, schemes, and artifices to defraud, and engaged in acts and 6 transactions and a course of business which operated as a fraud or deceit upon members of the 7 investing public who purchased Yahoo! common stock contemporaneously with the sale of such 8 stock by defendants.

9 337. Plaintiffs and other members of the Class who purchased shares of Yahoo! common 10 stock contemporaneously with the Individual Defendants’ sales of Yahoo! common stock: (1) have

11 suffered substantial damages because they relied upon the integrity of the market and paid artificially 12 inflated prices for Yahoo! common stock as a result of the violations of §10(b) and Rule 1 0b-5 13 alleged herein; and (2) would not have purchased Yahoo! common stock at the prices they paid, or at 14 all, if they had been aware that the market prices had been artificially and falsely inflated by 15 defendants’ misleading statements and concealment. At the time of the purchases by plaintiffs and 16 members of the Class, the fair and true value of Yahoo! common stock was substantially less than 17 the prices paid by them.

18 338. This action was commenced within five years after the sales by the Individual 19 Defendants while in possession of material, non-public information.

20 339. As a result of the foregoing, plaintiffs and the other members of the Class have 21 suffered substantial damages. 22 PRAYER

23 WHEREFORE, plaintiff prays for relief and judgment, as follows: 24 A. Determining that this action is a proper class action, certifying plaintiffs as class 25 representatives under Rule 23 of the Federal Rules of Civil Procedure and designating this 26 Complaint as the operable complaint for class purposes; 27 28

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1 B. Awarding compensatory damages in favor of plaintiffs and the other Class members 2 against all defendants, jointly and severally, for all damages sustained as a result of defendants’ 3 wrongdoing, in an amount to be proven at trial, including interest thereon;

4 C. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity 5 and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 to assure that the 6 Class has an effective remedy; 7 D. Ordering the Individual Defendants to disgorge their insider trading proceeds, 8 including a constructive trust over those proceeds; 9 E. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this 10 action, including counsel fees and expert fees; and 11 F. Awarding such other and further relief as the Court may deem just and proper. 12 JURY TRIAL DEMANDED 13 Plaintiffs hereby demand a trial by jury. 14 DATED: December 19, 2008 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 15 SPENCER A. BURKHOLZ HENRY ROSEN 16 ANNE L. BOX LAURIE L. LARGENT 17 JULIE A. WILBER 18 19 s/ HENRY ROSEN HENRY ROSEN 20 655 West Broadway, Suite 1900 21 San Diego, CA 92101 Telephone: 619/231-1058 22 619/231-7423 (fax)

23 Lead Counsel for Plaintiffs 24 SUGARMAN & SUSSKIND ROBERT SUGARMAN 25 100 Miracle Mile, Suite 300 Coral Gables, FL 33134 26 Telephone: 305/529-2801 305/447-8115 (fax) 27 Additional Counsel for Plaintiff 28 S:\CasesSD\Yahoo\CPT00055569-Amended.doc

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1 CERTIFICATE OF SERVICE

2 I hereby certify that on December 19, 2008, I electronically filed the foregoing with the Clerk 3 of the Court using the CM/ECF system which will send notification of such filing to the e-mail

4 addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have 5 mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF 6 participants indicated on the attached Manual Notice List. 7 I further certify that I caused this document to be forwarded to the following designated 8 Internet site at: http://securities.csgrr.com/. 9 I certify under penalty of perjury under the laws of the United States of America that the 10 foregoing is true and correct. Executed on December 19, 2008. 11 s/ HENRY ROSEN 12 HENRY ROSEN 13 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 14 655 West Broadway, Suite 1900 San Diego, CA 92101-3301 15 Telephone: 619/231-1058 16 619/231-7423 (fax)

17 E-mail: [email protected] 18 19

20 21 22

23 24

25 26 27 28 CAND-ECF Page 1 of 2 Case4:08-cv-02150-CW Document37 Filed12/19/08 Page187 of 188

Mailing Information for a Case 4:08-cv-02150-CW

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Mary K. Blasy [email protected],[email protected]

• Anne Louise Box [email protected]

• Spencer A. Burkholz [email protected],[email protected] ,[email protected],[email protected],[email protected]

• Patrick J. Coughlin [email protected],[email protected],[email protected]

• Alan I. Ellman [email protected],[email protected]

• Jordan Eth [email protected]

• Mark R.S. Foster [email protected],[email protected]

• Christopher J. Keller [email protected],[email protected]

• Mark Irving Labaton [email protected],[email protected]

• Laurie L. Largent [email protected]

• Judson Earle Lobdell [email protected],[email protected]

• Tricia Lynn McCormick [email protected],[email protected],[email protected]

• Andrei V. Rado [email protected]

• Darren Jay Robbins [email protected]

https://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?385697614606683-L_497_0-1 12/19/2008 CAND-ECF Page 2 of 2 Case4:08-cv-02150-CW Document37 Filed12/19/08 Page188 of 188

• Henry Rosen [email protected]

• Samuel S. Song [email protected]

• Anna Erickson White [email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

Nathan Bear Coughlin Stoia Geller Rudman and Robbins 655 West Broadway Suite 1900 San Diego, CA 92101

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EXHIBIT A Case4:08-cv-02150-CW Document37-1 Filed12/19/08 Page2 of 33

Click Fraud Research

Prepared for Coughlin Stoia Geller Rudman & Robbins LLP

December 19, 2008

Charles A. Richard, PhD

Click Fraud Research December 19, 2008 1 © 2008 Outsell, Inc. All rights reserved.

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Credentials

Outsell is the only research and advisory firm focused on the publishing, information, and education industries. Outsell’s international team provides independent, fact-based analysis and actionable advice about competitors, markets, operational benchmarks, and best practices. The firm analyzes markets, companies, and trends, and provides recommen- dations for high-level executives and product development, marketing, and strategy teams. Outsell invests significantly in original research each year to guide clients in optimizing their strategies, plans, and performance.

Outsell’s 300-plus clients are primarily information companies. This includes publishers, online information companies, search engine companies, market research companies, education companies, database companies, and other types of companies primarily engaged in the production, manipulation, sale of or distribution of or organization of information. The firm has no advertising agency or advertising services clients and does not sell any software. Founded in 1997 and headquartered in Burlingame, California, Outsell has a team of senior analysts who are industry experts with years of operational experience in the fields that they cover. Outsell analysts are routinely quoted by the national media and specialty trade media.

Outsell provides three primary types of services:

A. Outsell Market Intelligence Service B. Outsell Leadership Councils C. Outsell Custom Research Services

A. Market Intelligence Service

Publishing and information company executives want essential information delivered to them at the point of need in order to make smart strategic and tactical decisions. Outsell’s Market Intelligence Service tracks competitors and markets in 12 different information industry segments, delivering analysis and forecasts that its can act on to compete and thrive in today’s fast-changing global environment. Outsell offers subscriptions to the Market Intelligence Service (MIS) covering each 12 segments.

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The 12 segments are:

1. Search, Aggregation and Syndication 2. B2B Trade Publishing 3. Company Information for Lead Generation and New Business Development 4. Market Research Reports and Services 5. Information Technology Research Reports and Services 6. Credit & Financial Information 7. HR Information 8. Education & Training 9. Legal, Tax & Regulatory Information 10. News Providers & Publishers 11. Scientific, Technical & Medical Information 12. Yellow Pages & Directories

Outsell anticipates and answers questions such as the following using data-driven, fact-based analysis:

• What do my customers really want today? Next year? • Are there upstarts that I don't know about that will take a bite out of my business? • Is my business model obsolete, or soon to be? • Am I leaving money on the table by charging too little? • Am I losing business because I'm charging too much? • Am I using the best technologies for my products? • Am I even asking the right questions?

MIS Subscription privileges include:

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Outsell’s clients receive research reports, daily news analysis, access to online databases and access to the firm’s global team of information industry experts. The research report topics include market size (total revenue, revenue in each segment, actual and forecast revenue growth), market share; market trend reports; and company analyses on companies making an impact on their segment, including start-ups and disruptors. Description of Deliverables

Research Reports Delivered by e-mail in PDF format and available online.

Market Size, Share & Forecast: Each year MIS clients receive a preliminary Market Size & Share report for the entire industry, a comprehensive final Market Size & Share report for their segment, a Forecast report for their segment, and the Information Industry Outlook Report.

Market Reports: Throughout the year, clients receive additional market size, share and forecast reports covering specific markets within their segment.

Company Analysis: Clients receive ongoing coverage of companies or groups of companies making an impact on their segment. These reports include profiles and metrics of major competitors, interesting start-ups, and disruptors, as well as these companies’ flagship products.

Insights

Outsell’s Insights are briefs written by its analysts, covering worldwide news that affects the clients’ business and providing commentary on the trends behind these events. Insights are available by e-mail, RSS feed,

Online Databases

Ad Spending Database: contains results of an annual web-based survey to over 1,000 advertisers and includes information about budget allocations to online, print, events, TV, and radio. Clients use this database to understand where ad funding is going and for advertiser market segmentation and product planning.

Publishers & Information Providers Database: includes revenue, market size, and market share information on over 7,000 companies. Clients use this database to access information on companies within each industry segment, such as company descriptions, revenue, and market share rank.

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Information Markets & Users Database: contains original research on tens of thousands of users by role in corporate, government, healthcare, and education sectors. Clients use this database to learn about information spending, information-seeking behaviors, and what information is most important to end-users.

Analyst Access

A lead analyst is assigned to each client and provides strategic advice and insights by telephone or e-mail. The analyst can also put a client in touch with members of Outsell’s global team of dedicated industry experts with knowledge in other areas. Subscription includes analyst access for three people in each client workgroup; more can be added.

B. Outsell’s Leadership Councils

Outsell’s Leadership Council (OLC) is a peer-to-peer, by-invitation membership service for executive leaders of information, publishing, and content software technology companies. OLC members from across the globe experience a unique environment designed for discussing industry issues and sharing case studies and best practices in a confidential forum.

Outsell brings members together three times a year. Roundtable meetings are held twice annually, and members also receive a registration for Outsell’s Signature Event for industry VIPs and executives. OLC offers members the opportunity to problem-solve with executives in different market segments who have similar concerns and challenges but who would not normally cross paths.

Outsell’s leadership councils are hand-selected to create a mix of leaders from various industry sectors, regions, organization sizes, and revenue models. To qualify, an individual must be a CEO, COO, Managing Director, or President of a company or business unit. No competitors are in the same council, to ensure candid dialogue. Each council is limited to 20 members. Councils meet either at a US-based resort location in February and in New York in June, or in London in February and at a European resort location in June.

OLC member privileges:

• Two annual meetings – Maintain productive relationships and continue the dialogue by meeting twice yearly, in interesting and dynamic settings, to discuss best practices and topics important to you and your peers. Members set the agenda and provide input on the resort location.

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• Resort meeting on-site costs – Members are our guests upon arrival at the resort-location meeting. All meals, events, and hotel room costs (excluding incidentals) are covered during the meeting period.

• Registration at Outsell’s Signature Event –Membership includes a registration for Outsell’s Signature Event, held each autumn. This by- invitation event is the only global conference convening CEOs, COOs, Presidents, and Managing Directors from all information industry segments to address critical issues affecting the industry and its organizations.

• Member-specific research – Members request research from Outsell for each meeting on topics including benchmarking sales performance, salary trends, product IT investment, and industry metrics and trends about users or the success of various business models. Results are published as CEO Topics reports and presented at each meeting.

• Insights – Insights provides members with analysis and essential actions regarding key trends and events in the global information industry.

Outsell’s Leadership Council membership lets information industry executives expand their horizons by sharing new ideas, learning, and networking with a diverse group. Members also have personal access to Outsell’s most senior-level team to discuss confidential issues, and can receive data or reports that address specific business decisions they are facing.

There are currently four Outsell Leadership Councils will over 70 members in total.

C. Custom Research & Consulting

Outsell’s global team offers a wide range of tailored services to support clients’ mission-critical decisions as they adapt to rapidly changing market environments.

Outsell helps decision-makers who want to: • grow revenue and find new revenue streams • outperform the competition; find new markets • identify market size and share • improve performance based on best practices • understand why business is being won or lost • assess risk for a potential acquisition • strengthen internal planning to ensure that resources and capabilities are aligned with their company’s vision, strategic goals, and market expectations. Click Fraud Research December 19, 2008 6 © 2008 Outsell, Inc. All rights reserved.

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Outsell’s solutions include strategic assessment; market and customer segmentation; market size and opportunity assessment; product validation; win-loss, customer satisfaction, and loyalty measurement; and benchmarking.

Outsell Custom Research is individually priced and offered to prospective clients in a proposal describing the problem to be studied, the methodology Outsell will employ, the team that will be assigned to the project, the deliverables, timetable and price. These projects provide approximately 30% of Outsell’s total revenue and quoted prices for work to be performed typically range from $20,000 to hundreds of thousands of dollars or more.

For more information visit www.outsellinc.com/custom_services

Additional Outsell Services

Outsell’s Signature Event

Held each autumn, this by-invitation event is the only global conference convening CEOs, COOs, Presidents, and Managing Directors from all information industry segments to discuss the most important issues affecting the industry and its organizations. Every speaker is a keynote, every topic is essential. The event is highly interactive and held at world- class venues. Attendance is limited and on a first-come, first-served basis.

Strategy Visit

• Lead analyst update on market’s key players, disruptors, and dynamics • Facilitated team discussion about five key trends and potential market response • 2 hours of pre-work, 4 hours on-site • Customized strategy visits also available

Outsell Analysts

Outsell’s executive-level industry analysts have decades of experience developing, selling, buying, and using content. They’ve worked in the industries and positions of those they advise. Outsell analysts deliver independent, fact-based analysis and actionable advice to the firm’s MIS clients.

Click Fraud Research December 19, 2008 7 © 2008 Outsell, Inc. All rights reserved.

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Dr. Charles A. Richard’s Credentials

Dr. Charles A. Richard is Vice President and Lead Analyst specializing in advertising, lead generation and B2B trade publishing. Dr. Richard serves as a senior analyst and executive level advisor to a broad range of Outsell clients, covering information companies, their competitive positions, industry disruptors, advertising, lead generation and landscape-changing trends.

His clients benefit from his 25 years experience in strategic planning, investment banking, consulting and market analysis across an unusual breadth of information content segments. He has worked at senior executive levels in both large corporations, including at the headquarters offices of both Reed Elsevier’s (REL:LSE) LexisNexis and Reed Business Information, and in small privately held firms. While Vice President of Strategic Planning for B2B publishing leader Reed Business Information, previously doing business as Cahners, he was instrumental in the completion of more than 30 mergers and acquisitions valued at more than $1 billion.

Dr. Richard is frequently cited as an industry expert. His press credits include The Wall Street Journal, New York Times, Bloomberg Radio, National Public Radio, Business Week, Forbes, CNN Money, Associated Press, TheStreet.com, MarketWatch, Fortune Small Business, Boston Globe, Washington Post, Chicago Tribune, San Francisco Chronicle, LA Times, AdWeek, Advertising Age, Crain’s BtoB, MediaPost, InformationWeek, CNET and UPI. He is also frequently invited to make speaking appearances at industry events.

He has served on the Board of Directors of the Software and Information Industry Association (SIIA) and on American Business Media’s (ABM) Business Information Council. Dr. Richard was awarded Crain Communication Inc’s Who’s Who in B-to-B in 2006, 2007 and 2008. B- to-B is an industry abbreviation for Business-to-Business.

He earned his PhD (1979) and Masters degree (1978) in Quantitative Business Analysis from the University of Washington in Seattle, where he was awarded a full-year doctoral fellowship in his fourth year of graduate studies. Prior to that, he attended graduate school at Johns Hopkins University and was an undergraduate at Davidson College.

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Description of Outsell’s Advertising and Click Fraud Research

Outsell’s clients are publishers and other information companies that generate their revenue from:

• subscriptions, • fees they charge users to attend conferences and trade shows, • fees they charge exhibitor for booths at trade shows, • advertising and sponsorships and • lead generation activities.

For over a decade, Outsell has conducted extensive research and analysis to establish the revenues of thousands of the mostly private publishers and information companies that make up the industry. Outsell builds databases to categorize and roll-up the revenues of these thousands of firms to arrive at total revenue and growth rates for the 12 segments and the total professional information industry. The resulting Outsell databases have become the industry gold standard and include not only the industry’s total revenues but also revenue by individual company and break outs of that revenue into three components: subscriptions, advertising and transactions (one-time payments). Outsell’s clients access these databases online at Outsell’s websites and also by consulting with Outsell’s analysts when they have special industry size and growth requests.

Outsell’s research shows that 44.7% of the total business information industry’s revenue is derived from advertising, making advertising a significant focus of the firm’s clients, and therefore a significant area of research for Outsell. For 2007 this is summarized in Table 1.

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Table 1. Professional Information Industry Total Revenue Components Est. 2007 Est. 2007 Est. 2007 Est. 2007 Advertising Subscription Transactional Total Revenue (% of Revenue) (% of Revenue) (% of Revenue) ($M) Total Professional Information Industry 44.7% 35.6% 19.7% 387,118 2007

Source: Outsell’s Publishers and Information Providers Database © 2008 Outsell, Inc. Reproduction strictly prohibited.

Outsell’s 2006 Ad Study

Since 2006, Outsell has conducted an annual study of over 1,000 North American advertisers. This annual Ad Spending Study series was the first in the industry to reveal detailed trends across advertisers serving businesses, healthcare institutions and practitioners, and consumers. It compared key findings across advertisers and revealed “where, why, and how fast” advertisers are moving online, as well as the impacts of these shifts on print ads, events, and TV/Radio. It examined previously untracked areas such as advertisers’ adoption rates for online advertising; budget allocation; growth rates; trade-offs across all types of advertising; the effectiveness of Google vs. Yahoo! and Microsoft; the performance of keyword ads vs. contextual and behavioral ads; the factors driving advertising spending decisions; and the impact of click fraud.

Outsell Ad Study Methodology and Demographics of Sample

Outsell fielded a Web-based survey to 1,010 advertisers in August 2006. The respondents were all responsible for ad spending or for specifying ad budgets. Their advertising targets primarily corporate, healthcare, and consumer markets, and together they control $6.5 billion of advertising spending. The survey contained 36 questions, many of them requiring multi-part answers, and took from 45 minutes to an hour to complete.

This sample represents the total population with a confidence level of 95% and margin of error of ± 3%. A separate report in Outsell’s Ad Spending Study series contained a detailed analysis of advertisers in small, medium, and large firms. For consistency across the reports, Outsell maintained the same data in the Totals columns in all tables in these reports, and these totals represent all respondents.

Click Fraud Research December 19, 2008 10 © 2008 Outsell, Inc. All rights reserved.

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The study looked at five key media types:

1. Online. Search engines, e-mail marketing, the advertising companies’ own Web sites, trade information providers’ Web sites, sponsored content, general business sites, blogs, ads served on wireless devices, Webinars, and online directories. 2. Print. General business magazines, newspapers, direct mail, trade magazines and scholarly publications, directories, newsletters, and custom publications. 3. Events. Trade shows/exhibitions and conferences. 4. TV/Radio/Movies. 5. Other Marketing. PR, sales collateral, outdoor advertising, and other media.

Outsell implemented scaling factors to convert the distribution of advertisers that participated in this study into a mix that, by size of the advertiser’s firm, mirrors the total population of the U.S. companies doing the advertising. To do this, we examined the U.S. population of businesses by size of company, segmented into three size groups. Next, we looked at our survey respondents in each of those same three groupings. Then we applied a weighting factor to our sample group to report overall results that are proportionate to the market, yielding aggregate results that reflect the overall U.S. advertising market.

Demographics of Sample

Who Advertisers Target

Source: Outsell’s Advertising Tracking Database Base = 1,010 (Q5a, A)

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Size of Advertisers’ Firms

Source: Outsell’s Advertising Tracking Database Base = 938 (Q8, A)

Industries of the Advertisers Surveyed

Source: Outsell’s Advertising Tracking Database Base = 1,010 (Q5, A)

Click Fraud Research December 19, 2008 12 © 2008 Outsell, Inc. All rights reserved.

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Distribution of Annual Marketing Budgets

Source: Outsell’s Advertising Tracking Database Base = 1,010 (Q10, A)

Click Fraud Research December 19, 2008 13 © 2008 Outsell, Inc. All rights reserved.

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Outsell’s 2006 Special Click Fraud Study

Methodology

Outsell fielded a Web-based study of 407 advertisers May 12-16, 2006 to investigate advertisers’ assessment of the extent of click fraud in online advertising. The respondents are all U.S. residents, ages 18 years or older, employed full-time, and responsible for ad spending or for specifying ad budgets. Their advertising predominantly targets business and consumer markets, with small portions also targeting healthcare, government, and education. Outsell estimates that the entire set of advertisers included in the in the Click Fraud Research spent just under a billion dollars on advertising and marketing.

We designed the survey to provide analytical results for all respondents combined. The survey contained 16 questions, many of them requiring multi-part answers, and took approximately 20 to 30 minutes to complete. The confidence level is 95 percent +/- 5 percent.

Demographic Profile of Advertisers

The advertisers who responded to the study come from a cross section of U.S. companies targeting mostly businesses and consumers. The sample represents a well-distributed cross section of companies that we can extrapolate to those in the U.S. engaged in pay-per-click advertising.

In the Outsell click fraud study, the primary target markets of the total pool of advertisers are mostly businesses (42%) and consumers (41%). The remaining advertisers in this study target healthcare (7%), government (7%), and education (3%).

The key elements based on the distribution of the companies’ sizes are that:

• Small company advertisers make up the majority. Forty percent of the companies have less than $10 million in revenue and 50 percent have fewer than 100 employees. • Large companies, with $10 billion or more in revenue, make up 13 percent of the distribution, and 30 percent have 1,000 or more employees.

In looking at 2006 marketing budgets for these firms, 24 percent of respondents will spend less than $10,000 this year, a very low threshold influenced by the number of small companies in the study. Sixteen percent spend $1 million or more per year on marketing, as shown in the following

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chart. The respondents were asked to provide their total marketing spending, including advertising, PR, and marketing.

Distribution of Marketing Spending

Average Spending = $1.9 Million

$10 Million or more Less than $10,000 10% 24% $1-10 Million 6%

$100,000 to $1 Million 24% $10,000 to $100,000 36%

Source: Outsell’s Advertising Tracking Database Base = 407 © 2006 Outsell, Inc. Reproduction strictly prohibited.

The mix of ages of the respondents is also evenly distributed.

. Seventeen percent are 21 to 30. . Thirty-two percent are in their 30s. . Twenty-nine percent are in their 40s. . Twenty-two percent are 50 or older.

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Industries of the Advertisers Surveyed % of Respondents Base (407) Consulting & Professional Services 12% Financial Services 10% Computers & Software 6% Real Estate 5% Food, Beverage & Tobacco 4% Education - Universities 3% Healthcare - Practices, Clinics & Labs 3% Printing, Publishing & Information Svcs. 3% Advertising & PR 3% Non-profit 3% Metals Refining & Mfg. 3% Retail 3% Building & Construction 3% Insurance 3% Biotechnology & Pharmaceutical 2% Entertainment & Recreation 2% Automotive & Auto Parts Mfg. 2% Healthcare - Hospitals 2% Government - State 2% Industry Association 2% Telecommunications 2% Transportation Services 2% Education - K-12 2% Legal 2% Healthcare - Nursing & Residential Facilities 1% Personal & Other Services 1% Electrical Equipment 1% Healthcare - Social Assistance 1% Electronics & Semiconductors 1% Government - Federal 1% Apparel & Fashion 1% Machinery & Equipment 1% Aerospace & Defense 1% Business Services 1% Sales/Manuf. Rep. 1% Pulp & Paper 1% Chemical Manufacturing 1% Agriculture, Forestry & Fishing 1% Utilities 0% Transportation Equipment 0% Rubber & Plastics 0% Education - 4-year Colleges 0% All others 2%

Click Fraud Research December 19, 2008 16 © 2008 Outsell, Inc. All rights reserved.

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Geography of the Advertisers Surveyed % of Respondents (407) Base % California 12 Michigan 7 Florida 6 Georgia 6 Illinois 5 Massachusetts 5 New York 5 Texas 5 Minnesota 4 Ohio 4 North Carolina 3 Pennsylvania 3 Utah 3 Virginia 3 Wisconsin 3 Colorado 2 Indiana 2 Louisiana 2 Missouri 2 New Jersey 2 Tennessee 2 Alabama 1 Alaska 1 Arizona 1 Hawaii 1 Iowa 1 Kansas 1 Kentucky 1 Maryland 1 Mississippi 1 Montana 1 Nebraska 1 Nevada 1 New Hampshire 1 North Dakota 1 Oregon 1 Rhode Island 1 South Carolina 1 South Dakota 1 Washington 1 Washington DC 1 Arkansas * Connecticut * Delaware * Idaho * New Mexico * Oklahoma * West Virginia * Click Fraud Research December 19, 2008 17 © 2008 Outsell, Inc. All rights reserved.

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This data builds a profile of respondents to Outsell’s click-fraud study that demonstrates broad coverage of a cross-section of business sizes, marketing budgets, and ages that is free from spikes or skewed distribution of respondents.

Based on the successful completion of this research, Outsell permanently added two of the key click fraud questions used in the Click Fraud Research into its Annual Ad Spending studies, beginning with the one conducted in August 2006.

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Different Types of Click Fraud

Click fraud is conducted in different ways. For example, one form of click fraud occurs when the company such as Yahoo or Google placing the ad on other companies’ web sites, promises the advertiser it will match the ad with the content on the page where the ad appears, then fails to assure that it matches. Another example is when a person or program clicks on an advertiser's listings displayed on a web site in order to trigger a payment from the advertiser rather than for the purpose of viewing the underlying content in the advertisement. Neither of these fraudulent clicks examples leads to potential revenue for the advertisers and do not lead to purchases of advertisers’ products and services.

Outsell identifies seven types of click fraud, listed here.

• Match and Partner Site Dereliction

In programs such as Yahoo’s Content Match and Domain Match, the advertiser pays Yahoo or Google to make close matches of the subject of the ad with the subject of the web page of the content partner onto which Yahoo places the ad. Yahoo makes this appeal on its Content Match page: “Generate additional revenue by displaying ads related to the content on your web site.” See: http://publisher.yahoo.com/sell/ContentMatch.php?loc=USYPN0005 Dereliction of this responsibility occurs when Yahoo fails to (a) take sufficient measures to assure the ad relates to the content on Yahoo controlled web sites and / or (b) fails to monitor the content of its content partners’ web sites. It is not unusual for unscrupulous web site operators to fill web pages with nonsense-text and then request that Yahoo place ads on the site under Content Match. These sites are often called sblogs for “spam blogs”. Failure to maintain good content to ad subject matches and /or failure to routinely monitor content partners’ sites to detect sblogs constitutes match and partner site dereliction fraud.

• Spyware and Malware

Spyware and malware computer code embedded into webpages can falsely trigger clicks or redirect the web user to sites they have not chosen to visit for the purposes of inflating advertising fees billed to advertisers. Benjamin Edelman has made multiple studies of this type of click fraud.

• Paid to Read Sites

Affiliate fraud is probably the largest type. Yahoo, Google and other search engines boost their profits by redistributing their ads to other sites, including millions of "domain parking" companies that host many Click Fraud Research December 19, 2008 19 © 2008 Outsell, Inc. All rights reserved.

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thousands of dummy Web sites containing little if any content beyond ads. The dummy sites or click fraud rings recruit thousands of individuals around the world, employing them in PTR or paid-to-read campaigns, ostensibly to read articles of personal interest, but in reality to click on payable ads for which they earn about a penny per click.

The PTR company owners send their clickers e-mails touting hundreds of parked sites with Yahoo and Google ads, and urging them to click away. The fraudulent PTR sites are paid by the domain parker networks, which in turn, have revenue sharing agreements with the large search engines. Click-scammers are able to get away with the fraud by employing fake IP addresses and using algorithms to determine click patterns less likely to be detected and blot-out identifying references.

• Domain Kiting

Individuals take advantage of the five-day grace period offered by domain registry sites such as the International Corporation for Assigned Names and Numbers (ICANN). The scammers will register a site, loading it with PPC ads to see if it bears fruit. If it does not, they return the domain for a refund. If it works, they pay the $6 registration fee.

Some return the domain at the end of the grace period, then instantly and repeatedly re-register it, thus paying nothing. These so-called “domainers” can register thousands of sites.

• Typo Squatters

This is the use of web sites with URL’s that purposely misspell a company name, such as "Verison.com" for "Verizon.com," and that count on traffic to these sites from searchers’ spelling errors when typing in their search terms.

• Click Bots

Automated clickbot software, or Web server scripts, is popular among scammers because it disguises the user's unique IP address and can program clicks minutes apart to disguise intent. Many of these products are sold on the Internet. In October 2007 Business Week interviewed a Russian programmer who created "Clicking Agent," 5,000 copies of which he had sold to customers worldwide. It was marketed as a means to avoid detection; "the primary use is to cheat advertising companies," the programmer said.

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• Competitor Click Fraud

Competitor click fraud usually has the aim of draining a competitor's budget by repeatedly clicking on an ad. This also serves the purpose of driving the competitors ad offline, so that initiator's ad will receive greater exposure. In a variation of this type, some companies will "go dark," removing their ads while clicking on their competitors’ ads.

Note that “PPC Fraud: Every Click Counts...Or Does It?” by Frank Fortunato May 22, 2007 at Internet.com was the source for some of these definitions of click fraud variations.

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Results from Outsell’s Click Fraud Research

This section summarizes the results from Outsell’s research conducted in May 2006 specifically to examine the extent and impacts of Click Fraud (the Click Fraud Research).

One of the 16 Click Fraud Research study questions asked the 407 advertisers what methods advertisers used to monitor fraudulent clicks. See the Methodology section above for a detailed description of the study.

The question text and the four options that could be selected, followed by the number of advertisers using each option, follow:

“If your firm systematically analyzes click logs and reports and regularly monitors fraudulent clicks, please indicate whether this is done internally or by a third party service. Please select only one response.”

Options:

1. Internally (116) 2. Third-party service (57) 3. Combination of internal and third-party service (29) 4. Firm does not analyze click logs or monitor fraudulent clicks (205)

In summary, 202 advertisers analyzed their click logs and/or used third party services to analyze their click logs. This group of 202 advertisers will be referred to as the “Analyticals.”

The 205 who did not systematically analyze their click logs and do not ask third parties to analyze their click logs will be referred to as the “Non- Analyticals.”

The study asked all advertisers the following question about the extent of click fraud they experienced:

“What is your best estimate of the percent of clicks on your own ads that are fraudulent? Provide the net fraudulent click percentage that you are billed for after removing any click fraud refunds you have received.”

The bolding and underlined shown above were used in the text seen by the respondents. Both the recruitment process for study participants and the

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wording of all the questions in the study made it clear that the scope of the study included the total, combined set of all types of click fraud.

The results from this question are summarized below in Table 1.

The click fraud the “Analyticals” experienced is broken down in Table 1 by the size of the advertising firm as determined by the total number of employees in the firm.

Table 1: Net Percent of Fraudulent Clicks by Size of Advertiser

Percent Pct of Base "Analyticals" 21.2 Small 1-100 36% 72 21.0 Medium 101-1,000 24% 48 18.0 Large 1,001+ 40% 80 100% 202

Source: Outsell’s 2006 Click Fraud Study Database © 2008 Outsell, Inc. Reproduction strictly prohibited.

The Analyticals indicated that 19.9% of the clicks on their own ads were fraudulent. The Non-Analyticals, estimated that a much lower net 9.5% of the clicks on their ads were fraudulent. Those who were more rigorous and performed quantitative analysis indicated a net click fraud rate more than twice as high as the Non-Analyticals.

Table 2: Net Percent of Fraudulent Clicks by Advertiser’s Method of Analysis

9.5 Total for All "Non-Analyticals" Group 205

18.1 Internal 116 24.4 3rd Party 57 18.0 Both 29 19.9 Average for "The Analyticals" 202

Source: Outsell’s 2006 Click Fraud Study Database © 2008 Outsell, Inc. Reproduction strictly prohibited.

Click Fraud Research December 19, 2008 23 © 2008 Outsell, Inc. All rights reserved.

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Results from Outsell’s Ad Spending Study

This section summarizes the results from Outsell’s Annual Ad Spending study conducted in August 2006 (the Ad Spending Study) in which 1,010 advertisers participated. This annual study asked a broad set of 36 questions to determine how advertisers allocated their spending across different media (print, online, events, TV/radio and PR); their use of specific new advertising methods; and their evaluations of the effectiveness of different types of advertising. This study also included two of the identically worded click fraud questions asked in Outsell’s 2006 Click Fraud study.

This sample represents the total population of U.S. advertisers with a confidence level of 95% and margin of error of ± 3%. The 1,010 advertisers who participated were randomly selected and are a different set of advertisers than the 407 who participated in the Click Fraud study. Since both are large, randomly selected samples, the two groups have similar demographic profiles and represent two independent views of the same total set of U.S. advertisers.

One question in Outsell’s Annual Ad Spending study asks advertisers to rate the effectiveness of the Yahoo or Google keyword ads. These are ads that appear on search results pages and in this type of ad, Yahoo and Google attempt to match the ads to the words users type into the search engines. The Annual Ad Spending study also asks advertisers to rate the effectiveness of contextual ads placed by Yahoo or Google on other web pages. Yahoo’s and Google’s computer algorithms try to determine which pages have content relevant to the product or service being advertised. In these programs, the ads are meant to match the context of the web pages on which Yahoo and Google place them.

The 2006 Annual Ad Study data shows that 424 advertisers identified themselves as buyers of Yahoo keyword ads, 42% of the total. For Yahoo contextual ad buyers, the number was 354, 36% of the total.

Table 3 shows the analysis of click fraud by the size of the firms paying Yahoo for keyword ads, measured by the total number of employees in the firm.

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Table 3: Net Percent of Fraudulent Clicks by Size of Firm Purchasing Yahoo Keyword Ads Pct of Percent Yahoo Base Advertisers 21.7 Small <100 49% 207 21.5 Medium 101-1,000 21% 91 23.4 Large 1,001+ 30% 126 100% 424 Source: Outsell’s 2006 Annual Ad Study Database © 2008 Outsell, Inc. Reproduction strictly prohibited.

Table 4 shows the net percent of fraudulent clicks indicated by these two groups.

Table 4: Net Percent of Fraudulent Clicks by Only Those Advertisers Who Purchase Yahoo Ads

Category of Advertiser Percent Base

Purchasers of Yahoo Keyword Ads 22.1 424

Purchasers of Yahoo Contextual Ads 22.5 354 Source: Outsell’s 2006 Annual Ad Study Database © 2008 Outsell, Inc. Reproduction strictly prohibited.

The overlap between the Yahoo keyword ad purchasers and Yahoo contextual ad purchasers is 77.2%. That is, 77.2% of the advertisers that pay Yahoo to place keywords on Yahoo search sites also pay Yahoo to place contextual ads on other web sites.

Outsell’s 2006 Annual Ad Study data provides additional measures of click fraud rates for comparison and context, calculated from other groupings of advertisers.

• Advertisers who purchased Google keyword (473 advertisers) and contextual ads (376 advertisers) reported click fraud rates of 21.8% and 22.2%, respectively, for purchasers of Google keyword ads and contextual ads.

• The 503 advertisers who did not purchase either Yahoo’s or Google’s keyword or contextual ads reported a much lower, 10.9% click fraud rate.

Click Fraud Research December 19, 2008 25 © 2008 Outsell, Inc. All rights reserved.

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Impact of Findings on Yahoo’s Financial Results

1. The 21.1% and 22.5% click fraud rates for purchasers of ads from Yahoo are probably conservative. This is because the Annual Ad Study data does not allow us to isolate the subset equivalent to the 202 “Analyticals” that were isolated in the Click Fraud Study.

We have shown that the click fraud rate of 19.9% for the 202 Analyticals in the Click Fraud study is much higher than the average for the total sample of all 407 advertisers, which was 14.6%. Since approximately half of the advertisers in the Click Fraud study were Analyticals, it’s reasonable to assume that half of the advertisers in the 2006 Annual Ad study were also analytical.

Although no question was asked in the 2006 Annual Ad Study that would permit us to isolate the “Analyticals,” we feel it is reasonable to assume that these “imputed Analyticals” in the Annual Ad Study would, similar to the Click Fraud Study “Analyticals”, also indicate a higher click fraud rate than the observed average values for the Yahoo advertisers. The 21.1% and 22.5% rates are the averages for the total Yahoo advertisers in the Annual Ad Study, and since they are averages, they are probably lower than what a group of Yahoo advertisers “Analyticals” would have reported.

2. We recommend using an average of three click fraud rates. We have selected the ones that are the most targeted, that is, most applicable to Yahoo’s pay per click advertising, and that are most analytically based.

Click Fraud Study 19.9% The “Analyticals” Annual Ad Study 22.1% Purchasers of Yahoo Keyword Ads Annual Ad Study 22.5% Purchasers of Yahoo Contextual Ads

Average 21.5% of clicks

3. To calculate the amount paid to Yahoo by advertisers for the clicks that the advertisers’ analyses indicated were fraudulent, the 21.5% average from item three, above, would be multiplied by Yahoo’s total revenue received from advertisers buying pay per click (PPC) advertising from Yahoo.

Click Fraud Research December 19, 2008 26 © 2008 Outsell, Inc. All rights reserved.

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Yahoo does not break out PPC advertising revenue in its SEC filings.

Outsell has estimated the percent of Yahoo Marketing Services revenue attributable to revenue paid to Yahoo by its PPC advertisers by applying several analytical steps.

• Outsell analyzed the trends in Marketing Services revenues in Yahoo’s SEC filings from 2002 through 2006, in which total Marketing Services revenues are specified

• Outsell calculated the effect of Yahoo’s acquisition Overture in the fourth quarter of 2003. Practically 100% of Overture’s revenue was derived from providing PPC advertising and since, for the full year 2003, that PPC revenue was more than $900 million. Thus the acquisition of Overture raised Yahoo’s estimated 2003 PPC revenue of slightly more than $250 million to over $1 billion in PPC revenue in 2004 by the addition of Overtures $900 million in PPC revenue obtained from advertisers.

• Outsell used its extensive experience in breaking out individual components of information companies’ revenue, which is a core competency developed over the years and an essential skill Outsell uses for its ongoing company revenue estimates and related market sizing activities and revenue by segment database building. The results of applying all these steps and skills are the following Outsell expert estimates.

Estimated Percent of Revenue from PPC Advertising

2004 33% of Total Marketing Services Revenue 2005 35% of Total Marketing Services Revenue 2006 38% of Total Marketing Services Revenue

These percents can be applied to Yahoo’s annual or quarterly Marketing Services revenue.

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Charles A. Richard, PhD Vice President & Lead Analyst [email protected]

The information, analysis, and opinions (the “Content”) contained herein are based on the qualitative and quantitative research methods of Outsell, Inc. and its staff’s extensive professional expertise in the industry. Outsell has used its best efforts and judgment in the compilation and presentation of the Content and to ensure to the best of its ability that the Content is accurate as of the date published. However, the industry information covered by this report is subject to rapid change. Outsell makes no representations or warranties, express or implied, concerning or relating to the accuracy of the Content in this report and Outsell assumes no liability related to claims concerning the Content of this report.

Outsell is the only worldwide market research and consulting company that delivers must-have intelligence and advice to publishers and information providers. We analyze markets, companies, and trends, and 330 Primrose Road, Suite 510  Burlingame, CA 94010 provide fact-based recommendations for high-level executives and product Tel. +1 650 342 6060  Fax + 1 650 342 7135 development, marketing, and strategy teams. In addition, we work with

information managers to benchmark spending and demonstrate best 7-15 Rosebery Avenue  London, EC1R 4SP practices. Outsell invests significantly in original research each year to Tel. +44 (0)20 7837 3345  Fax +44 (0)20 7837 8901 guide clients in optimizing their strategies, plans, and performance. [email protected] www.outsellinc.com

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As a publishing executive, you want essential Why Outsell? information delivered to you at the point of need in Our executive-level industry analysts have decades order to make smart strategic and tactical decisions. of experience developing, selling, buying, and Outsell’s Market Intelligence Service tracks competitors using content. They’ve worked in the industries and and markets in your information industry segment, positions of those they advise. Our analysts deliver delivering analysis and forecasts that you can act on to independent, fact-based analysis and actionable compete and thrive in today’s fast-changing global advice about: environment.

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Online Databases Market Size, Share & Forecast: Each year you’ll receive a preliminary Market Size & Share report for the entire Publishers & Information Providers Database: includes industry, a comprehensive final Market Size & Share revenue, market size, and market share information report for your segment, a Forecast report for your on over 7,000 companies. Use this database to segment, and the Information Industry Outlook Report. access information on companies within each industry segment, such as company descriptions, revenue, and market share rank. Market Reports: Throughout the year, you’ll receive additional market size, share and forecast reports covering specific markets within your segment. Information Markets & Users Database: contains original research on tens of thousands of users by role in corporate, government, healthcare, and education Company Analysis: You’ll receive ongoing coverage of sectors. Use this database to learn about information companies or groups of companies making an impact spending, information-seeking behaviors, and what on your segment. These reports include profiles and information is most important to end users. metrics of major competitors, interesting start-ups, and disruptors, as well as these companies’ flagship products. Ad Spending Database: contains results of an annual web-based survey to over 1,000 advertisers and includes information about budget allocations to Insights online, print, events, TV, and radio. Use this database to understand where ad funding is going and for Outsell’s Insights are briefs written by our analysts, advertiser market segmentation and product planning. covering worldwide news that affects your business and providing commentary on the trends behind these events. Insights are available by e-mail, RSS feed,

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