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ADAMS v. INTRALINKS

July 20, 2004.

MARK S. ADAMS, MARK S. ADAMS as trustee for THE BROWN-ADAMS TRUST, JOHN MULDOON, JOHN MULDOON as co-trustee of the JOHN MULDOON TRUST, THE JOHN MULDOON TEN YEAR ANNUITY TRUST and JMV MULDOON CHILDREN TRUST, DUNCAN BROWN, SARAH-BROWN-ADAMS, SAM TROWE, DAVID MULDOON, DAVID MULDOON as the trustee of THE MULDOON FAMILY TRUST, VALERIE TOMEI MULDOON as co-trustee of the VALERIE MULDOON TRUST, THE J. MULDOON FAMILY INVESTMENT LP, EUGENE A TOMEI, FRED BENJAMIN, RUTH LOHR-BENJAMIN, and CHERYL SNYDER, Plaintiffs,
v.
INTRALINKS, INC., a Delaware Corporation, J.P. MORGAN CHASE BANK, J.P. MORGAN SECURITIES, INC., WILLIAM BLAIR & COMPANY, L.L.C., BANC OF AMERICA SECURITIES, L.L.C., and HELLER, EHRMAN, WHITE, & McAULIFFE LLP, Defendants.



The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

I. INTRODUCTION

  This suit arises out of the failed initial public offering ("IPO") of Intralinks, Inc. ("Intralinks"), and the subsequent private financing undertaken by the company. Plaintiffs allege multiple violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),*fn1 specifically Rule 10b-5 promulgated thereunder.*fn2 Plaintiffs also assert claims under the Employee Retirement Income Security Act of 1974 ("ERISA"),*fn3 and under state law.*fn4 Defendants now move, pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6) or 12(e), for: (1) dismissal of the first nine counts of the Complaint for failure to state a claim, (2) denial of supplemental jurisdiction over plaintiffs' state law claims, and (3) dismissal of the Complaint for lack of subject matter jurisdiction, or, in the alternative, (4) a more definite statement. Plaintiffs oppose dismissal and seek leave to amend the Complaint.

  II. BACKGROUND

  The factual allegations of the Complaint are assumed to be true for the purposes of the motion to dismiss.

  A. Adams and Muldoon Found Intralinks

  In 1996, Adams and Muldoon, with others, co-founded and incorporated Intralinks.*fn5 Intralinks provides and manages secure digital workspaces for the execution of financial and commercial transactions.*fn6 Adams served as Director, President, and Chief Executive Officer from Intralinks's founding until February 2000, and as Chairman of the Board from May to October of 2000.*fn7 Muldoon served as Intralinks's Chief Financial Officer and Treasurer from Intralinks's founding through 2000, as Director through 1998, and as an observer to the Board through January 2001.*fn8 All plaintiffs owned Intralinks stock or stock options prior to Intralinks's January 31, 2001 financing (the "G financing").*fn9

  B. Intralinks Implements the 1997 Stock Incentive Plan

  In 1997, Intralinks introduced a Stock Incentive Plan (the "1997 Plan") to award compensation to company officers.*fn10 Adams was granted a total of 823,788 stock options and Muldoon was granted a total of 261,152 stock options pursuant to the 1997 Plan.*fn11

  C. Intralinks Agrees to Undertake Its IPO with JP Morgan as Lead Underwriter

  By January 2000, Intralinks had raised $65,000,000 in private financing, and was a successful private company.*fn12 On April 16, 2000, defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc. (collectively, "JP Morgan"), and Banc of America Securities, L.L.C., and William Blair & Co., L.L.C. (together with JP Morgan, "Bank defendants") agreed to underwrite Intralinks's IPO for a seven percent underwriting fee.*fn13 JP Morgan represented to Intralinks that 85% of the stock would be sold to investors who would hold the stock for a long period of time ("strong hands").*fn14 JP Morgan also represented to Intralinks that it would price the IPO if the Intralinks IPO was oversubscribed by fifteen percent, the difference between the total IPO offering and the percentage of shares being sold into "strong hands."*fn15

  Plaintiffs allege that representations regarding both the Bank defendants' compensation and JP Morgan's intentions regarding the IPO were materially false because JP Morgan intended to engage in illegal aftermarket activities after the IPO.*fn16 Such activities include "laddering" (requiring customers to make purchases in the aftermarket in exchange for an allocation of stock during the IPO), "spinning" (buying back the IPO allocation and then re-selling the stock to the customers in order to receive increased commissions on the sale), and the use of undisclosed tie-in agreements.*fn17

  D. JP Morgan Extends Private Loans to Adams and Muldoon

  In the Spring of 2000, JP Morgan extended $500,000 lines of credit to Adams and Muldoon.*fn18 In order to secure the loans, Adams and Muldoon entered into pledge agreements, pledging their Intralinks stock to JP Morgan as collateral.*fn19 JP Morgan represented to Adams and Muldoon that JP Morgan would protect the value of the collateral and look solely to the collateral for payment.*fn20

  E. JP Morgan Refuses to Price Intralinks's IPO

  After hiring the Bank defendants to underwrite the IPO, plaintiffs subsequently embarked upon a "road show," a marketing trip designed to generate interest in Intralinks prior to the IPO, which was scheduled for July 26, 2000.*fn21 As of July 24, 2000, the Intralinks IPO was oversubscribed.*fn22 On July 24, just before the end of the road show and the scheduled pricing date, the Bank defendants convinced Adams and Intralinks "to increase the number of shares offered in the IPO from 4.6 million to 5.3 million" due to strong demand*fn23 Prior to July 26, JP Morgan refused an all-cash offer from someone identified as William Frey to purchase $2,500,000 worth of Intralinks stock, allegedly because Frey would not engage in the illegal practices of spinning and laddering.*fn24

  On July 26, 2000, Intralinks filed a registration statement for the IPO with the Securities Exchange Commission ("SEC").*fn25 Thereafter, JP Morgan refused to price and sell the IPO.*fn26 The only reason given for the failure to price was a vague reference to the stock not being sufficiently over-subscribed.*fn27 However, 7.7 million shares were subscribed for the 5.4 million share offering.*fn28 Plaintiffs allege that, in reality, JP Morgan refused to price the deal because it learned that it might become the subject of an SEC inquiry into its IPO ...


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