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DEMARIA v. ANDERSEN

March 29, 2001

BRIAN DEMARIA, ROBERT BRISKEN, EDWARD SISCO AND TERRY C. WHORTON, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
V.
WILLIAM P. ANDERSEN, III, PETER W. MINFORD, BRUNS H. GRAYSON, PETER C. MORSE, RANDALL E. POLINER, ING BARING FURMAN SELZ LLC, WARBURG DILLON READ LLC, KPMG LLP AND ILIFE.COM, INC., DEFENDANTS



The opinion of the court was delivered by: Pauley, District Judge.

  MEMORANDUM AND ORDER

This is a securities class action arising out of the May 13, 1999 initial public offering ("IPO") of ILife.com, Inc. (formerly known as Intelligent Life Corporation) in which the company issued 3,500,000 shares of common stock priced at $13 per share. Subsequent to the offering, on May 24, 1999, ILife announced its 1999 first quarter results, including an increase in net losses to $6,207,000 from $703,000 in the first quarter ended March 31, 1998. Following this announcement, the stock price of ILife steadily declined and on June 14 2000, the day before the plaintiffs filed their amended complaint, stood at $1.75 per share.

Plaintiffs bring this action on behalf of all persons or entities who purchased ILife common stock during the period May 13, 1999 through June 15, 2000. Plaintiffs sue ILife and five of its officers and directors who signed the registration statement (collectively, the "ILife Defendants"), the two lead underwriters ING Barings Furman Selz LLC and Warburg Dillon Read LLC (the "Underwriter Defendants"), and the accounting firm of KPMG LLP for violations of Section 11, Section 12(a)(1) and Section 15 of the Securities Act of 1933, 15 U.S.C. § 77k, 771(a)(1) & 77o. The ILife Defendants and the Underwriter Defendants move to dismiss the amended complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. By stipulated order, defendant KPMG has been dismissed from this action without prejudice.

Factual Background

The following facts are drawn from the amended complaint, publicly available documents filed with the Securities and Exchange Commission ("SEC") incorporated by reference into the amended complaint, and other documents that form the record in this action.

Plaintiffs are purchasers of ILife common stock following the company's May 13, 1999 IPO. (Amended Class Action Complaint For Violations of Federal Securities Laws dated June 15, 2000 ("Am. Compl.") ¶¶ 8-11.) Because three of the four named plaintiffs purchased stock no earlier than six months after the IPO, plaintiffs rely solely on the more immediate purchases of named plaintiff DeMaria to support their standing to bring this lawsuit.*fn1 (See Transcript of Oral Argument ("Tr.") dated October 12, 2000 at 17.) More specifically, on May 17, 1999, plaintiff DeMaria's IRA — three days after the IPO at a price of $12.75 — purchased 4,000 share of ILife from Morgan Stanley, a secondary underwriter not named as a defendant in this lawsuit. (See Decl. of Brian Murray In Support of The DeMaria Group's Motion To Be Appointed Lead Plaintiff And For Approval of Its Selection Of Lead Counsel, Ex. 3.)

Defendant ILife creates, produces and syndicates personal finance information through Web sites, print publications, and broadcast segments. (Am.Compl. ¶ 28.) Defendants William P. Anderson III, Peter W. Minford, Bruns H. Grayson, Peter C. Morse and Randall E. Poliner served either as officers and/or directors of ILife during the relevant time period and each signed the registration statement. (Am. Compl. ¶¶ 13-15.) The Underwriter Defendants participated in the IPO as lead underwriters. (Am.Compl. ¶¶ 16-17.)

In connection with its IPO, ILife filed an initial registration statement (including a prospectus) with the SEC on March 11, 1999. (Am.Compl. ¶ 29.) On May 13, 1999, the SEC declared ILife's registration statement (the "Registration Statement") and prospectus (the "Prospectus") effective. (Am.Compl. ¶ 30.) Thereafter, pursuant to 17 C.F.R. § 230.424 (b)(1), ILife electronically filed its Registration Statement and Prospectus (the "Electronic Prospectus") with the SEC through the EDGAR filing system.*fn2 (See Am. Compl. ¶ 31; Ex. B to Decl. of Jay B. Kasner dated July 17, 2000 ("Kasner Decl.").)

All investors who purchased shares in the IPO were provided with a printed copy of the Prospectus (the "Printed Prospectus"). (See Am. Compl. ¶¶ 2, 33; Ex. A to Kasner Decl.) At page 5, the Printed Prospectus contained a bar graph depicting historical online publishing revenues and net losses on a quarterly basis for the 1998 calendar year and the first quarter of 1999. For purposes of the electronic filing, ILife prepared a narrative description of the bar graph pursuant to SEC regulations. See 17 C.F.R. § 232.304 (a) (2000). A comparison, however, of the bar graph in the Printed Prospectus with the narrative in the Electronic Prospectus reveals a discrepancy: the Electronic Prospectus identified ILife's net losses as publishing revenues and omitted any reference to net losses.*fn3 (See Am. Compl. ¶¶ 37-38.)

Seizing upon this discrepancy, plaintiffs allege that the "prospectus contained in the registration statement declared effective by the SEC and filed with the SEC," i.e., the Electronic Prospectus, "is not the prospectus pursuant to which Ilife.com common stock was offered to the investing public," i.e., the Printed Prospectus. (Am. Compl. ¶ 32.) Thus, pursuant to Section 12(a)(1) of the Securities Act, plaintiffs seek rescission of their purchases of ILife shares on the ground that they are "unregistered securities." (Am.Compl. ¶¶ 33, 52-55.)

In addition, the amended complaint avers that the Prospectus was materially false and misleading in violation of Sections 11 and 15 of the Securities Act because it failed to disclose the financial results for the quarter ended March 31, 1999, even though that quarter ended forty-three days before the IPO. In particular, on May 24, 1999, eleven days after the effective date, ILife announced in a press release that, in the first quarter ended March 31, 1999, the company's net loss increased dramatically to $6,027,000 and revenues totaled approximately $2,226,000. (Am. Compl. ¶ 49; Press Release dated May 24, 1999, attached as Ex. C to Kasner Decl.) The amended complaint alleges that the company's 1999 second and third quarter results further project the decline in the company's profitability. (See Am. Compl. ¶ 50.) In light of the May 1999 press release and other post-IPO disclosures, plaintiffs submit that the Prospectus misrepresented and omitted a number of material facts that reflected the true financial condition of the company. Those material facts include: (i) a purported reversal in the trend of 25% revenue growth; (ii) a substantial increase in the ratio of net loss to revenue; (iii) an increase in stockholder deficit as reflected on the company's balance sheet for the period ending December 31, 1998; and (iv) the manner in which the proceeds of the IPO would be applied. (See Am. Compl. ¶¶ 42, 44, 45-48.)

Defendants assert that when measured against the actual disclosures in the Prospectus, plaintiffs' allegations are factually overstated or incorrect. For example, plaintiffs charge that the undisclosed results for the first quarter of 1999 show that revenue increased by "a mere 10% over the December 1998 quarter," a claimed reversal of the "promising trend of revenue growth of at least 25% per quarter." (Am.Compl. ¶¶ 40-42.) Defendants maintain that this allegation is overstated due to plaintiffs' inaccurate rounding of revenue figures. Defendants argue that the actual reported figures show ILife's quarterly growth in 1998 to be uneven and belie plaintiffs' assertion that the company's quarterly revenue growth in 1998 exceeded 25%:

Comparison of ILife's Quarterly Revenue

3/31/98 6/30/98 9/30/98 12/31/98 3/31/99
Am. Compl. $950,000 $1,200,000 $1,600,000 $2,000,000 $2,200,000
¶¶ 41-42 (%) (%) (%) (%)
Figures $950,000 $1,203,000 $1,583,000 $1,886,000 $2,226,000
reported by (%) (%) (%) (%)

ILife*fn4

As the above chart demonstrates, the actual reported increase in revenue for the first quarter of 1999 was 18%, virtually the same percentage as at the end of the prior year and much larger than the 10% incorrectly alleged by plaintiffs.

In addition, plaintiffs allege that ILife "suffered a massive loss in the March 1999 quarter which was undisclosed to investors as the time of the [IPO]." (Am.Compl. ΒΆ 3.) As a by-product of this omission, plaintiffs claim that the Prospectus failed to disclose ILife's net loss as a percentage of revenue, which increased from 68% at six months ended December 31, 1998 to 270% for the first quarter ended March 31, ...


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