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In re Aol, Inc. Repurchase Offer Litigation

United States District Court, Second Circuit

December 5, 2013


Jonathan M. Moses, Adam M. Gogolak, Michael J. McDuffie, Wachtell, Lipton, Rosen & Katz, New York, NY, for defendants.

Peter C. Harrar, Beth A. Landes, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, for plaintiff.


DENISE COTE, District Judge.

In an Opinion and Order of August 19, 2013, the Court granted defendants' motion to dismiss this case and directed the Clerk of Court to enter judgment for the defendants. In re AOL, Inc. Repurchase Offer Litig., ___ F.Supp.2d ___, 2013 WL 4441516 (S.D.N.Y. 2013). Under the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), courts are required to make specific findings as to the compliance by all parties and attorneys with Rule 11(b), Fed. R. Civ. P., at the conclusion of all private actions arising under the Securities Exchange Act of 1934, as does this one. 15 U.S.C. ยง 78u-4(c); ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 579 F.3d 143, 152 (2d Cir. 2009). This Opinion concludes that plaintiff's counsel must be sanctioned for filing a frivolous complaint.


On April 9, 2012, AOL announced the sale of a patent portfolio to Microsoft for $1.056 billion in cash. News of the sale caused the price of AOL's stock to jump 43% in a single day. Less than a month later, on May 3, the Rosenfarb Law Firm filed this action. At a conference on August 10, 2012, Barbara Keeling was appointed Lead Plaintiff of the putative class and Wolf Haldenstein was selected as Lead Counsel. Wolf Haldenstein filed a consolidated complaint on September 28.

In contrast to the original complaint, which made vague and conclusory allegations about an effort by AOL to sell its portfolio of patents, this new consolidated complaint introduced a clear theory of fraud. It claimed, in essence, that AOL had conducted a sham auction of the patent portfolio to disguise the fact that it had months earlier agreed to sell the patents to Microsoft. The consolidated complaint alleged that the purpose of this dissimulating was to keep AOL's stock price depressed while the company completed a repurchase program under which it acquired approximately 14.8 million shares of its own stock, stock that became much more valuable when the news of the patent sale was revealed.

The principal source for this theory was a blog post written by Mark Stephens under the pen name Robert X. Cringely. Among the allegations in the pleading was the assertion that "during the fall", before the spring sale of the portfolio, AOL's Armstrong had called Microsoft's CEO Steve Ballmer "to spur Microsoft's long-held interest in acquiring the Patent Portfolio and to close the deal". Similar allegations were sprinkled through the pleading.

On October 26, 2012, the defendants moved to dismiss the consolidated complaint. They complained about the implausibility of the complaint's theory and the lack of support for it, as well as its reliance on the blog post. While the plaintiff's opposition to the motion reiterated support for the "secret deal" theory, the plaintiff did not provide any source for the allegation that Armstrong and Ballmer closed the deal in a telephone call months before the auction. Instead, plaintiff insisted that the complaint "does not rely on Stephens' blog for its factual allegation that a secret deal was reached with Microsoft, " and instead argued that the secret deal theory was "a fair inference."

An Order of January 4, 2013, gave the plaintiff a final opportunity to amend her complaint, of which the plaintiff took advantage. On January 18, the plaintiff filed an amended consolidated complaint (the "Amended Complaint"). The Amended Complaint continued to rely on the blog and to press the theory of a secret, undisclosed deal between AOL and Microsoft. It alleged that AOL had selected Microsoft to buy the portfolio "well before" the beginning of the auction process, and that AOL's Armstrong had contacted Microsoft's Ballmer during the fall of 2011 "to close out" AOL's expectation that Microsoft would acquire the portfolio and to "close the deal."

The defendants renewed their motion to dismiss on February 1, noting again that the plaintiff still identified no support for the allegation that Armstrong and Ballmer had reached a secret deal by telephone. In opposing the motion, the plaintiff disclosed for the first time that the source for this allegation was an April 9, 2012 news report from Reuters.

The Reuters story did not provide support for the allegations about the telephone call or the secret deal. It generally described the sales process as a genuine auction and reported that bids had been received from Amazon, eBay, Google, and Facebook, with the final buyer selected "late on April 5." The article's only mention of the telephone call was its statement that "Armstrong said he made a call to [Ballmer] alerting him of the decision to sell the patents." The Reuters story thus fell far short of supporting an allegation that the conversation had occurred in the fall, that is, months before the auction, or that the men had closed any deal during the conversation. In fact, the article directly contradicts such an account, as it indicates only that Armstrong told Ballmer that AOL had decided to sell the patents. The article also described a vigorous auction process with a final buyer selected on April 5.

Defendants' motion to dismiss was granted in an Opinion & Order of August 19. In the Opinion & Order, the Court found that the "allegation that Armstrong placed one telephone call to Ballmer to close the deal' is recklessly made without any factual support." 2013 WL 4441516, at *7. It added that "[n]o fair reading of the article suggests that a call was made to close' a secret deal in advance of the auction." Id. at *7 n.3. An Order ...

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