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UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS
) KENNETH R. LEVINE on behalf of himself and all others similarly ) situated, ) CIVIL ACTION NO. -- JLA : ) Plaintiff, ) CLASS ACTION COMPLAINT ) FOR VIOLATIONS OF v. ) FEDERAL SECURITIES LAWS ) LYCOS, INC. and ROBERT J. DAVIS, ) ) JURY TRIAL DEMANDED ) Defendants. ) ) NATURE OF THE ACTION
1. This is a class action on behalf of all purchasers
of the common stock of Lycos, Inc.("Lycos" or the "Company")
between January 25, 1999, and February 9, 1999, inclusive, (the
"Class Period"), seeking to pursue remedies under the Securities
Exchange Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
2. This Court has jurisdiction over the subject
matter of this action pursuant to 28 U.S.C. 55 1331, 1337 and
1367 and Section 27 of the Exchange Act (15 U.S.C. 5 78aa).
3. This action arises under Sections 10(b) and 20(a)
of the Exchange Act (15 U.S.C. 5 5 78j(b) and 78t(a)) and Rule
10b-5 promulgated thereunder (17 C.F.R. 5 240.10b-5). 001 4. Venue is proper in this Diffrict pursuant t..,c) 55,c
tion 27 of the Exchange Act (15 U.S.C. 5 78aa) . and 28
§ 1391(b) and (c). Substantial acts in furtherance of the
alleged fraud and/or its effects have occurred within this _ ft 6C ' A.:,,, .-.4-i.,Z--r- . ;41thi...1_,_ :,) ci,./ , ---
District and Lycos maintains its principal executive offices in this District.
5. In connection with the acts and omissions alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications, and the facilities of the national securities markets. PARTIES
6. Plaintiff Kenneth R. Levine, a resident of Sharon,
Massachusetts, purchased Lycos common stock during the Class
Period, as set forth in the accompanying certification which is incorporated herein by reference, and was damaged thereby.
7. Defendant Lycos is a Delaware corporation with its principal place of business at 31 St. James Avenue, Boston,
Massachusetts. Lycos is a global Internet navigation and community network dedicated to helping online users locate, retrieve and manage information personalized to their individual interests by providing easy-to-use information tools. It is well-known as one of the leading "Internet Portal" companies whose success and the trading value of its shares is tied closely to the extraordinary and dynamic performance of that fast emerging sector of the telecommunications industry.
8. Defendant Robert J. Davis serves as the Chief
Executive Officer and President of the Company. Defendant Davis, as a senior officer and director of Lycos, was a controlling person of the Company and exercised his power and influence to
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cause and engage in the fraudulent practices complained of herein.
9. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Lycos common stock, by 1 disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding Lycos's business and the intrinsic value of Lycos common stock; and (ii) caused plaintiff and other members of the Class to purchase Lycos common stock at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
10. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased or otherwise acquired Lycos common stock between January 25, 1999, through February 9, 1999, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are defendants, members of the immediate family of each of the Individual
Defendants, any subsidiary or affiliate of Lycos and the directors, officers and employees of Lycos or its subsidiaries or affiliates, or any entity in which any excluded person has a controlling interest, and the legal representatives, heirs, successors and assigns of any excluded person.
11. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at this time and can
3 only be ascertained through appropriate discovery, plaintiff
believes that there are thousands of members of the Class located
throughout the United States. As of November 30, 1998, there were reportedly more than 42.9 million shares of Lycos common
stock outstanding. Throughout the Class Period, Lycos common
stock was actively traded on the NASDAQ. Record owners and other
members of the Class may be identified from records maintained by
Lycos and/or its transfer agents and may be notified of the
pendency of this action by mall, using a form of notice similar
to that customarily used in securities class actions.
12. Plaintiff's claims are typical of the claims of
the other members of the Class as all members of the Class were
similarly affected by defendants' wrongful conduct in violation
of federal law and state law that is complained of herein.
13. Plaintiff will fairly and adequately protect the
interests of the members of the Class and have retained counsel
competent and experienced in class and securities litigation.
14. Common questions of law and fact exist as to all
members of the Class and predominate over any questions solely
affecting individual members of the Class. Among the questions
of law and fact common to the Class are:
i) whether the federal securities laws were vio-
lated by defendants' acts and omissions as alleged herein;
ii) whether defendants participated in and
pursued the common course of conduct complained of herein;
iii) whether documents, press releases, and other
statements disseminated to the investing public and the Company's
4 shareholders during the Class Period misrepresented material
facts about Lycos;
iv) whether the market price of Lycos common
stock during the Class Period was artificially inflated due to
the material misrepresentations and failures to correct the
material misrepresentations complained of herein; and
v) to what extent the members of the Class have
sustained damages and the proper measure of damages.
15. A class action is superior to all other available
methods for the fair and efficient adjudication of this contro-
versy since joinder of all members is impracticable. Further-
more, as the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation
make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in
the management of this suit as a class action.
SUBSTANTIVE ALLEGATIONS
16. Lycos has experienced a tremendous upsurge in the
stock market value of its shares in less than a year. On
February 24, 1998, the stock closed at $17 9/32 per share. On
January 11, 1999, Lycos shares hit a 52-week high of $145 3/8 per
share. On February 5, 1999, Lycos recorded its recent closing
high of $137 per share. On February 8, 1999, the stock continued
to trade a high levels, closing at $127.25 per share.
17. The upsurge in the trading price of Lycos shares was driven by its having positioned itself as one of the leading players in providing access to the explosively developing
5 Internet communications network. Investors were purchasing the stock based on the expectation that Lycos would continue to be a
"pure play" Internet stock that had positioned itself to stay at the front-rank of developments within the fast-burgeoning industry.
18. On January 25, 1999, defendant Davis, the
Company's President and CEO and primary spokesperson, presented the keynote address at the Massachusetts Software Council Annual
Membership Meeting held at the Newton Marriott Hotel. During his presentation, which was publicly reported, Davis made the following public commitments regarding Lycos' competitive posture:
• that Lycos was committed to an independent strategy; and
• that Lycos has an obligation to consider any reasonable proposals for a strategic transaction but that it was only interested in remaining independent and was not considering selling a portion of the business.
19. On January 25, 1999, an article appeared in the
New York Times concerning Lycos and highlighting that "Lycos
Officials Plan To Stay Independent." The article contained the following important passage which quoted defendant Davis as stating:
"Lycos Inc., an Internet portal whose stock has ballooned as rumors have swirled about talks with potential partners, is committed to an independent future, the company's chief executive said today.
"What were most committed to is the independence of Lycos," Robert Davis told reporters before a speech to the
6 Massachusetts Software Council. But he added, "If there's a partnership out there that respects that, broadens our content brand and distribution, we'd be interested in it." 20. That same day, an article appeared in the Boston
Herald regarding Lycos which reiterated the same themes. The article stated in pertinent part as follows:
Sale? What sale?
Lycos Inc. Chief Executive Bob Davis yesterday downplayed talk that the Waltham Internet hub could soon sell some or all of its stock to a media or telecommunications giant.
Davis, speaking to reporters at a Massachusetts Software Council meeting in Newton, said that company has flirted with potential partners for the past two years. And despite At Home Corp. snapping up rival Excite Inc. for $6.7 billion in stock last week, Davis said his company may well continue to go it alone.
"It's not for lack of interest," he added. Analysts have named media giants, including Time warner Inc., CBS Corp. and Bertelsmann in Germany, as the most likely buyers.
Experts say Lycos, which acts as a gateway to the Internet with everything from free e-mail to a Web directory, could use a partner to help attract more users.
Still, Davis disputed reports that the company plans to sell 10 percent to 35 percent of its shares to a strategic partner. "The numbers are meaningless," he said. Davis said he has an obligation to consider any offers but remains "committed to an independent strategy."
Pointing to the Excite deal, Davis said it would be hard for employees to maintain their passion for building a major Internet hub once they are absorbed by another entity.
7 21. The statements referenced in V!1 18-20 were each materially false or misleading when issued as they misrepresented and/or omitted the following adverse facts which then existed and disclosure of which was necessary to make the statements made not false and/or misleading, including:
(a) that Lycos was in serious and advanced discussions to merge with USA Networks, Inc., with its shareholders constituting no more than 30 percent of the equity holders in the combined entity and that the form of such transaction would necessarily involve Lycos losing its
"independent status";
(b) that Lycos was not "committed to an independent strategy" as it was then in serious and advanced discussions to sell itself, and transfer control, in a transaction that would vastly dilute its shareholders and reduce them to a distinct minority position in a newly-created company;
(c) that the Internet hyper-premium reflected in
Lycos stock market value was based on the false assumption that defendants were committed to maintaining Lycos as a "pure play"
Internet operator, whereas, in fact, they were seriously exploring and arranging for the amalgamation of Lycos' operations with those of USA Networks, Inc., whose operations range from home shopping to ticket sales and other diversified operations that are remote from the Internet segment and not as highly valued by the market; and
(d) even to the extent that the market may have perceived or been led to assume that if Lycos did engage in a
8 deal, its assumption was that it would only do so with a
compatible Internet purveyor, such as Excites merger with At
Home, by which the super-valuation of the stock through its focus on the Internet segment could be maintained and potentially magnified.
22. On February 9, 1999, Lycos shocked the market by announcing that it signed a definitive agreement to merge with
USA Networks, Inc.'s ("USA") e-commerce and Internet assets and
Ticketmaster Online-Citysearch, Inc. ("Ticketmaster"). According to the Company's press release, under the agreements,
Ticketmaster and Lycos will merge and USA will contribute its
Home Shopping Network, Ticketmaster and Network/First Auction to the new company, which is to be named USA/Lycos Interactive
Networks, Inc. Post-transaction, Lycos shareholders will own a mere 30 percent of the newly-formed company with Ticketmaster shareholders owing 8.5 percent and USA owning 61.5 percent. It was reported that Lycos shareholders will receive 2.25 shares of
USA -- consideration of $94.50 per Lycos share, a discount to the then prevailing approximately $127 per share of Lycos -- plus an option to buy preferred shares in the newly formed company.
23. Although the merger has been portrayed as a transaction by which USA will merge into Lycos, that is form prevailing over substance, as USA and its senior management will be the dominant players in the newly-combined entity. The primary player at USA is Barry Diller, a long established media executive who relinquishes control to no one.
9 24. The price of Lyons plummeted in response to this announcement -- which revealed that Lycos would be losing its independence and that its shareholders would be subsumed in a minority position in a newly-created company -- dropping from
$127.25 per share to $94.25 per share, a decline of 25% on extremely heavy volume. The following day the price of Lycos stock slumped to $87.25 per share.
25. The market for Lycos's common stock was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Lycos common stock traded at artificially inflated prices during the Class Period until the time the fact that Lycos had engaged in the wrongful course of conduct described herein was finally communicated to and understood by the securities markets. Plaintiff and other members of the Class purchased or otherwise acquired Lycos common stock relying upon the integrity of the market price of Lycos stock and market information relating to Lycos and have been damaged thereby. 26. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Lycos stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business, finances and operations, including, inter alia:
10 (a) that Lycos was in serious and advanced
discussions to merge with USA Networks, Inc., with its
shareholders constituting no more than 30 percent of the equity
holders in the combined entity and that the form of such
transaction would necessarily involve Lycos losing its
"independent status";
(b) that Lycos was not "committed to an
independent strategy" as it was then in serious and advanced
discussions to sell itself, and transfer control, in a
transaction that would vastly dilute its shareholders and reduce
them to a distinct minority position in a newly-created company;
(c) that the Internet hyper-premium reflected in
Lycos' stock market value was based on the false assumption that
defendants were committed to maintaining Lycos as a "pure play"
Internet operator, whereas, in fact, they were seriously
exploring and arranging for the amalgamation of Lycos' operations
with those of USA Networks, Inc., whose operations range from home shopping to ticket sales and other diversified operations
that are remote from the Internet segment and not as highly
valued by the market; and
(d) even to the extent that the market may have
perceived or been led to assume that if Lycos did engage in a
deal, its assumption was that it would only do so with a
compatible Internet purveyor, such as Excite's merger with At
Home, by which the super-valuation of the stock through its focus
on the Internet segment could be maintained and potentially magnified.
11 27. At all relevant times, the material
misrepresentations and omissions particularized in this Complaint
directly or proximately caused or were a substantial contributing
cause of the damages sustained by plaintiff and other members of
the Class. As described herein, during the Class Period,
defendants made or caused to be made a series of materially false
or misleading statements about Lycos's business and operations.
These material misstatements and omissions had the cause and
effect of creating in the market an unrealistically positive
assessment of Lycos and its business and operations, thus causing
the Company's common stock to be overvalued and artificially
inflated at all relevant times. Defendants' materially false and
misleading statements during the Class Period resulted in
plaintiff and other members of the Class purchasing the Company's
common stock at an artificially inflated price, thus causing the
damages complained of herein.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
28. At all relevant times, the market for Lycos common
stock was an efficient market for the following reasons, among
others:
(a) Lycos common stock met the requirements for
listing, and was listed and actively traded, on the NASDAQ, a
highly efficient market;
(b) As a regulated issuer, Lycos filed periodic public reports with the SEC and the NASDAQ;
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milmn (c) Lycos stock was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.
(d) Lycos regularly issued press releases which were carried by national newswires. Each of these releases was publicly available and entered the public marketplace.
29. As a result, the market for Lycos securities promptly digested current information with respect to Lycos from all publicly-available sources and reflected such information in
Lycos's stock price. Under these circumstances, all purchasers of Lycos common stock during the Class Period suffered similar injury through their purchase of stock at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
30. The statutory safe harbor provided for forward- looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
The specific statements pleaded herein were not identified as
"forward-looking statements" when made. Nor was it stated with respect to any of the statements forming the basis of this complaint that actual results "could differ materially from those projected." To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking
13 statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking was made the particular speaker knew that the particular forward- looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of Lycos who knew that those statements were false when made.
SCIENTER ALLEGATIONS
31. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements, issued or disseminated by or in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Lycos and its business practices, their control over and/or receipt of Lycos's allegedly materially misleading misstatements and/or their associations with the
Company which made them privy to confidential proprietary information concerning Lycos were active and culpable participants in the fraudulent scheme alleged herein. Defendants knew and/or recklessly disregarded the falsity and misleading
14 nature of the information which they caused to be disseminated to the investing public.
BASIS OF ALLEGATIONS
32. Plaintiff has alleged the foregoing based upon the investigation of plaintiff's counsel, which included a review of
Lycos's SEC filings, regulatory filings and reports, securities analysts reports and advisories about the Company, press releases and other public statements issued by the Company, media reports about the Company, and believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. Among other things, the extraordinary close contemporaniety between the challenged statements and the announcement of the proposed merger overwhelming supports the inference and conclusion that defendant
Davis, on behalf of Lycos, grossly misled the market when, failing to remain silent or issuing a safe "no comment" he boldly, publicly and unconditionally asserted -- falsely -- that
Lycos was and would remain independent.
FIRST CLAIM
(Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants)
33. Plaintiff repeats and realleges each and every allegation contained above.
34. Each of the defendants: (a) knew or recklessly disregarded material adverse non-public information about Lycos' business, which was not disclosed; and (b) participated in
15 drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about
Lycos.
35. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
36. Defendants have violated § 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder in that they (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of Lycos stock during the Class Period.
37. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for Lycos stock. Plaintiff and the
Class would not have purchased Lycos stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' false and misleading statements.
16 SECOND CLAIM
(Violation Of Section 20(a) Of The Exchange Act Against Defendants)
38. Plaintiff repeats and realleges each and every
allegation contained above.
39. Defendant Davis acted as a controlling person of
Lycos within the meaning of Section 20(a) of the Exchange Act.
By reason of his senior executive and Board position he had the
power and authority to cause Lycos to engage in the wrongful
conduct complained of herein.
40. By reason of such wrongful conduct, Lycos and
defendant Davis are liable pursuant to §20(a) of the Exchange
Act. As a direct and proximate result of these defendants'
wrongful conduct, plaintiff and the other members of the Class
suffered damages in connection with their purchases of Lycos
stock during the Class Period..
WHEREFORE, plaintiff pray for relief and judgment, as
follows:
i) Determining that this action is a proper class ac-
tion, designating plaintiff as Lead Plaintiff and certifying
plaintiff as class representatives under Rule 23 of the Federal
Rules of Civil Procedure and their counsel as Lead Counsel;
ii) Awarding compensatory damages in favor of plaintiff
and the other Class members against all defendants, jointly and
severally, for all damages sustained as a result of defendants'
wrongdoing, in an amount to be proven at trial, including inter- est thereon;
17
Mn AM
iii) Awarding plaintiff and the Class their reasonable
costs and expenses incurred in this action, including counsel
fees and expert fees; and
iv) Such other and further relief as the Court may deem
just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: February 22, 1999
MOULTON & GANS, LLP
,-)
By: e q fen/J o ncf/.(Fir), BBO #358480 cy Free an Gans, BBO #184540 125 Summer S reet Bos'ton, Mass. 02110 (617) 261-4600
MILBERG WEISS BERSHAD HYNES & LERACH LLP Steven G. Schulman Samuel H. Rudman One Pennsylvania Plaza 49th Floor New York, NY 10119 (212) 594-5300
Attorneys for Plaintiffs
18
sn ATTACHMENT "A"
Stephen Moulton, BBO #358480 Nancy Freeman Gans, BBO #184540 MOULTON & GANS, LLP 125 Summer Street Boston, Mass. 02110 (617) 261-4600
Steven G. Schulman Samuel H. Rudman MILBERG WEISS BERSHAD HYNES & LERACH LLP One Pennsylvania Plaza 49th Floor New York, NY 10119-0165 (212) 594-5300
I. CERTIFICATZCK OP =MT'It. LXVIN2 212215aS_QE-Clairlitardr--- Kenneth R. Levine ("plaintiff") declares, as to the claims asserted under the federal seCurities . laws, that: 1. Plaintiff has reviewed the complaint prepared by counsel in the above-captioned case and has authori2ed its filing. 2. Plaintiff did not purchase the securities that are the subject of the complaint at the direction of plaintiff's counsel or in order to participate in any private action arising under the federal securities laws. 3. Plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary. 4. During the proposed Class Period, plaintiff executed transactions in the securities of Lycos Inc. as follows: See Attached schedule. S. In the past three years, plaintiff has not sought to serve as a representative party on behalf of a class in an action filed under the federal securities laws. 6. Plaintiff will not accept any, payment for serving as a representative party on behalf of a cIais beyond plaintiff's pro rata share of any recovery, except such 'reasonable costs and expenses (including lost wages) directly reaating to the representation of the Class as ordered or approved by the Court. I declare under penalty of perjury that the foregoing is true and correct. Executed this 19th day of February, 1999.
nneth R. Levi e AsaIzabal* 1/201 260 Iiq 1/2_ 23/ 00 ,