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In re Iac/Interactivecorp Securities Litigation

March 19, 2010

IN RE IAC/INTERACTIVECORP SECURITIES LITIGATION


The opinion of the court was delivered by: Richard J. Holwell, District Judge

MEMORANDUM

OPINION AND ORDER

This is a securities class action brought on behalf of the class of individuals who bought shares in IAC/InterActiveCorp ("IAC") between March 13, 2003, and August 3, 2004. In their First Amended Complaint, (the "First Complaint"), plaintiffs brought claims under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), Sections 10(b) and 20(a) of the Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5. The Court dismissed all claims but granted plaintiffs leave to amend. In re IAC/InterActiveCorp Sec. Litig., 478 F. Supp. 2d 574, 606--07 (S.D.N.Y. 2007) ("IAC I"). The plaintiffs accepted that invitation with their Second Amended Complaint (the "Second Complaint"), which defendants have now moved to dismiss. For the reasons stated below, the Court grants defendants' motion and dismisses the Second Complaint in its entirety.

BACKGROUND

For purposes of this motion, all allegations in the Second Complaint are taken as true. Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 151 (2d Cir. 2007). Many of the Second Complaint's allegations simply repeat allegations contained in the First Complaint; the interested reader is directed to IAC I for a fuller recitation of the factual background. See IAC I, 478 F. Supp. 2d at 578--84.

I. Parties

The plaintiffs allege that they are shareholders of IAC. (Second Compl. ¶¶ 5--8.) They purport to bring claims on behalf of a putative class of shareholders who bought or otherwise acquired shares of IAC between March 13, 2003 and August 3, 2004. (Id.) The defendants include IAC and several of its executives.*fn1

IAC describes itself as "a leading internet company with more than 50 fast-growing, highly-related brands." See About IAC, http://www.iac.com/About-IAC/. During the class period, the company was organized into eight divisions, of which Travel was the largest. (Second Compl. ¶ 23.) IAC Travel consisted of several subsidiaries, including Hotwire, Expedia, and Hotels.com. (Id.) Hotwire was originally a partnership with American Airlines, America West, Continental, Northwest, United, and USAirways. (Id. ¶ 60.) These and other airlines agreed to provide discounted airline seats for sale through Hotwire's website. (Id.) IAC's hotel-related businesses, Expedia and Hotels.com, worked similarly: hotels provided discounted hotel rooms for resale over the Internet through the Expedia and Hotels.com websites. (Id. ¶ 71.)

IAC grew partly through acquisitions. (Id. ¶ 25.) In early 2003, for example, it announced that it would acquire the shares it did not already own of Expedia and Hotels.com. (Id.) In May 2003, the company said that it would buy LendingTree. (Id.) And on September 22, 2003, IAC announced that it had agreed to acquire Hotwire for cash. (Id. ¶¶ 25, 65.)

II. Allegations

IAC Travel's subsidiaries acted primarily as intermediaries between suppliers and consumers by aggregating and selling large blocks of consumer goods and services, like hotel rooms and airline tickets. (Id. ¶ 23.) The success of the company's travel segment thus depended on its ability to obtain a favorable supply of discounted airline seats and hotel rooms. (Id. ¶¶ 24, 59, 71.) Despite all this, plaintiffs allege that, during the class period, IAC failed to disclose significant supply problems that plagued its travel division. (Id. ¶ 30.)

A. Hotel Business

First, plaintiffs allege that IAC failed to disclose unfavorable "trends" or "changes" in IAC's hotel business during 2003. (Id. ¶¶ 29, 36, 57.) They point to increased competition from IAC's suppliers, who "were vastly improving their own online capabilities." (Id. ¶¶ 32, 75(b).) As a result, hotels provided IAC with fewer rooms and limited its ability to mark up rates for the rooms they did provide. (Id. ¶ 34.) Plaintiffs also claim that the company's hotel business was adversely affected by supplier and customer dissatisfaction. (Id. ¶¶ 33, 37.) In particular, plaintiffs allege, citing several "Confidential Informants," that Hotels.com and Expedia made late payments to suppliers for hotel rooms; often displayed a message on their websites that a particular hotel's rooms were sold out when they were not; and routinely overbooked their supply of hotel rooms. (Id. ¶¶ 31, 33, 38.) These bad business practices, plaintiffs say, made unhappy hotel chains threaten to stop doing business with IAC. (Id. ¶ 31.) Their lone example is that, in 2004, InterContinental Hotels Group PLC ("InterContinental") announced that it would stop working with Expedia because the company did not meet InterContinental's customer service standards. (Id. ¶¶ 33, 79.)

The plaintiffs say that IAC failed to disclose these problems in an amended Form S-4 the company filed with the SEC in connection with the merger deal it made with LendingTree in May 2003. (Id. ¶ 27.) A Form S-4 is a streamlined registration statement that certain qualifying issuers are allowed to file; it allows issuers to incorporate by reference prior periodic filings like Forms 10-K and 10-Q. (Id.) An issuer using Form S-4 is required to describe "any and all material changes in the registrant's affairs that have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest annual report to security holders and that have not been described in a report on [Form 10-Q] or [Form 8-K]." U.S. Securities and Exchange Commission Form S-4, at 8--9, available at http://www.sec.gov/about/ forms/forms-4.pdf. Among other things, this requires that the Form S-4 include "known trends and uncertainties" with respect to "net sales or revenues or income from continuing operations" that have not already been disclosed in the company's Forms 10-Q or 8-K. See Item 303(a) of Regulation S-K, 17 C.F.R. § 229.303(a). Plaintiffs allege that the problems in IAC's hotel business were "known trends and uncertainties" within the meaning of Item 303(a) of Regulation S-K. (Second Compl. ¶ 29.)

In addition, plaintiffs allege that IAC's 2002 Form 10-K, which was incorporated by reference into the LendingTree Form S-4, misrepresented Hotels.com's relationships with suppliers and its customer service:

Hotels.com has room supply relationships with a wide range of independent hotel operators and lodging properties, as well as hotels associated with national chains, including Hilton, Sheraton, Wyndham, Hyatt, Radisson, Best Western, Loews, Doubletree, La Quinta, Courtyard by Marriott and Hampton Inn. Hotels.com believes that these suppliers view it as an efficient distribution channel to help maximize their overall revenues and occupancy levels. Although Hotels.com contracts in advance for volume room commitments, its supply contracts often allow it to return unsold rooms without penalty within a specified period of time. In addition, because Hotels.com contracts to purchase rooms in advance, it is able to manage billing procedures for the rooms it sells and thereby maintain direct relationships with its customers. Hotels.com has developed proprietary revenue management and reservation systems software that is integrated with its websites and call center operations. These systems and software enable Hotels.com to accurately monitor its room inventory and provide prompt, efficient customer service. Hotels.com believes that its supply contracts and revenue management capabilities differentiate it from retail travel agencies and other commission-based resellers of accommodations. (Id. ¶ 44 (emphasis in original).) The plaintiffs argue that Hotels.com could not possibly have believed its suppliers viewed it as an "efficient distribution channel to help maximize their overall revenues and occupancy levels," given the ongoing erosion of its relationships with those same suppliers. (Id.) They also say that it was misleading for IAC to suggest that Hotels.com's computer systems allowed it to provide "prompt, efficient customer service," given that Hotels.com was at that time experiencing "customer service issues" that were "substantially eroding its customer service levels." (Id.)

B. Airline Business

Second, plaintiffs allege that IAC issued misleading guidance about Hotwire's arrangements with major airlines. Specifically, they say that during a November 5, 2003 conference call, IAC chief executive Barry Diller inaccurately represented to investors that "Hotwire's airline suppliers were contractually obligated to supply Hotwire" with the "same number of airline seats" "at the same pricing" provided to Hotwire ...


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