2 Lead Plaintiff Argent Classic Convertible Arbitrage Fund, L.P.'s First Amended Class Action

127 Pages·2007·6.66 MB·English

Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 1 of 127
THE HON RABLE ROBERT S LAI
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7 CV01-00640 900000052 w ^D157UTSRIDLTSTORFICTWASHINGTON
DEPUTY
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UNITED STATES DISTRICT COURT
9 WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
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11 ARGENT CLASSIC CONVERTIBLE
ARBITRAGE FUND, L.P., on behalfofitself
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all others similarly situated, No C01-0640L
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Plaintiff, COMPLAINT-CLASS ACTION
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V. LEAD PLAINTIFF ARGENT
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CLASSIC CONVERTIBLE
AMAZON.COM INC., JEFFREY P. BEZOS, ARBITRAGE FUND, L P.'S FIRST
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JILL COVEY, TOM A. ALBERG, SCOTT D. AMENDED CLASS ACTION
17 COOK, L JOHN DOERR, AND PATRICIA Q COMPLAINT FOR VIOLATIONS
STONESIFER, OF THE SECURITIES ACT OF 1933
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Defendants. JURY DEMAND
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Lead PlaintiffArgent Classic Convertible Arbitrage Fund, L P. ("Lead Plaintiff' or
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22 "Plaintiff'), individually and on behalfofall other persons similarly situated, by its undersigned
23 attorneys, for its first amended complaint, alleges as follows uponpersonal knowledge as to itself
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and its own acts, and upon information and beliefas to all other matters, based uponthe
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investigation made by and through its attorneys, which investigation included, inter alia, a review of
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the public documents and press releases ofAmazon.com, Inc. ("Amazon" or the "Company") and
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28 other defendants and the pleadings filed in this Court in other securities actions filed against
McKayChadwell, C
LEAD PLAINTIFF'S FIRSTAMENDED COMPLAINT-CLASS ACT ML I , ii Avenue, Suite-1 01
(COI-0640L) - 1 U le,Washington981
G\CLIENTSk01337\001\PLEADll{GS\FISTAMENDEDCOMPLAINT.2PLDDOC ) 800 Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 2 of 127
defendants Lead Plaintiffbelieves that further substantial evidentiary support will exist for the
allegations set forth below after a reasonable opportunity for discovery
2
NATURE OF ACTION
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1. Plaintiffbrings this action as aclass action pursuant to the Securities Act of 1933 as
(the "1933 Act") to remedy defendants' negligent conduct. None ofthe pleadings contained
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herein should be read to claim, invoke or assert any element offraud against any defendant.
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8 Plaintiffdoes not claim, invoke or assert any such element. Plaintiffbrings this action on
9 behalfofitselfand all otherpersons, except defendants and certain related parties, who
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purchased the 6.875% Premium Adjustable Convertible Securities due 2010 ("PEACS") of
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Amazon at any time from their initial offering (which was announced on February 7, 2000
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and which closed on or about February 16, 2000) through and including October 24, 2000
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14 (the "Class Period"), to recover damages caused by defendants' violation ofthe 1933 Act.
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2 The PEACS were publicly offered pursuant to an offering that was announced on or about
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February 7, 2000 (along with the filing ofthe Preliminary Prospectus) and that closed on or
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about February 16, 2000 (the "Offering") This action arises from untrue statements and
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omissions ofmaterial facts contained in the Offering Documents.1 These untrue statements
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20 and omissions concern the nature and amount ofrevenues to be received by Amazon under
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agreements reached between Amazon and itspartners in what Amazon termed the "Amazon
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I
23 The PEACSwere issuedpursuantto aregistration statementon Form S-3 filedwiththe Securities
Exchange Commission (the "SEC") onMay 19, 1999, as amended on Form S-3/A filed withthe SEC on June 8,
24 1999 (collectively, the "Universal ShelfRegistration Statement"), providing forthe issuance ofupto $2 billion
in various classes ofequity, debt,warrants and othersecurities which incorporated otherdocuments(the
25 "Offering Documents") filedwiththe Securities Exchange Commission, including
(i) an indenture betweenAmazonandthe Bank ofNew York, datedFebruary 16, 2000, and
26 included as an exhibitto Amazon's Form 8-K filedwiththe SEC on February 16, 2000,
(n) aPreliminary Prospectus SupplementonForm424B5 filedwiththe SEC on February 7, 2000
27 (the "Preliminary Prospectus"), and
(in) aFinalProspectus Supplement onForm424B5 filedwiththe SEC on or about February 14,
28 2000(the "Prospectus")
McKay Chadwell,PLLC
LEADPLAINTIFF'S FIRSTAMENDED COMPLAINT -CLASS ACTION 701 FifthAvenue, suite7201
(C01-0640L)- 2 Seattle, Washington98104
Cr\CLIENTS\O1337\0011PLEADINGSIFISTAI ENDEDCOMJ'LAINr2PIADOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 3 of 127
S
Commerce Network." This action also arises from defendants' sale ofthe PEACS in
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violation ofSection 5 ofthe 1933 Act and Section 12 ofthe 1933 Act.
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3 3. The Amazon Commerce Network ("ACN") was the name given to a business initiative
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developed by Amazon in late 1999 and early 2000. During this time, Amazon entered into
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agreements with a series ofother internet retailers (Amazon's partners in the Amazon
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Commerce Network). The agreements purportedly involved two features: (i) a minority
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8 equity investment by Amazon in its ACN partner, and (ii) the promotion ofthe partner's
9 products, or the integration ofthe partner's products or services, on Amazon's website, in
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exchange for a cash fee payable to Amazon.
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4 Between January 21, 2000 and February 1, 2000, Amazon issued in quick succession four
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press releases announcing such agreements with four companies: Greenlight.com,
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14 drugstore coin, Audible, Inc., and living.com. Each ofthese press releases, as described in
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detail below, specified the equity stake that Amazon had taken in its partner and specified the
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fees to be paid by the partner to Amazon in exchange forthe services provided by Amazon
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In the four press releases, Amazon announced that its partners would pay to Amazon a total
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of$362.5 million -- $82.5 million from Greenlight corn; $105 million from drugstore coin;
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20 $30 million from Audible, Inc.; and $145 million from living coin overthe next three to five
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years.
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5. During late January 2000, Amazon senior management communicated the terms ofthese
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ACN transactions to various securities analysts at Morgan Stanley & Co , Credit Suisse First
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25 Boston, and Donaldson Luflcin & Jenrette ("DLY'), including without limitation Mary
26 Meeker ofMorgan Stanley and Jamie Kiggen ofDonaldson, Lufkin & Jenrette (now Credit
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Suisse First Boston) who were, at least as early as late January, 2000, involved in
28
McKay Chadwell,PLLC
LEAD PLAINTIFF'S FIRSTAMENDED COMPLAINT -CLASS ACTION
701 FifthAvenue,Suite7201
(CO1-0640L) - 3 Seattle,Washington98104
G LIENTS10133710011PLEADINGS\FISTAMENDEDCONIPLAINT2PLD.DOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 4 of 127
withAmazon to underwrite a large prospective offering ofEurobonds by Amazon
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According to analyst reports from these investment banks, which were underwriting the
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3 PEACS Offering, these agreements were highly material "watershed" events in Amazon's
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history and highly material to Amazon's financial condition and to investors See Exhibits A
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- G. Further, according to analyst reports issued during the period February 1, 2000 through
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the PEACS Offering date by these investment banks underwriting the PEACS Offering, the
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8 ACN cash fees payable to Amazon under such agreements (1) were, in toto, actually higher
9 than $362 5 million (according to Morgan Stanley, approximately $450 million; according to
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DLJ, "over $500 million"); (ii) would "accelerate Amazon's path to profitability" because
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the ACN fee revenue had virtually no costs associated with it -- i.e , because ACN cash fees
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were nearly pure profit or, as stated by Kiggen and DLJ, "a 100% gross margin revenue
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14 stream;" and (iii) would result in $120 million ofadditional income to Amazon in Fiscal Y
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2000. See Exhibits B, C, F and G.
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6. These Underwriters also stated in these reports thatthey expected more ACN deals and that
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the ACN deals would increase Amazon's gross margins.
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7. On February 7, 2000, Amazon publicly announced its intention to conduct a convertible debt
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20 offering, and filed with the SEC a Preliminary Prospectus Supplement for the Offering. On
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February 14, 2000, Amazon filed a Prospectus Supplement in final form for an offering of
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E600 million ofPEACS Both Prospectus Supplements prominently featured a section titled
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"Recent Developments" that described the four ACN agreements -- and the $362.5 million to
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be received by Amazon underthose agreements
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26 8 On February 16, 2000, Amazon announced the successful completion ofits PEACS
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raising E690 million from investors (including over-allotments).
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McKayChadwell,PLLC
LEAD PLAINTIFF'S FIRSTAMENDED COMPLAINT -CLASS ACTION 701 FifthAvenue, Suite 7201
(COI-0640L)-4 Seattle,Washington98104
G\CLIENTSID1337\0011PLEADINGSWISTAMENDEDCOMPLAINT2PLDDOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 5 of 127
9 However, defendants omitted to disclose priorto the Offering -- inthe Offering Documents
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or elsewhere -- that nearly all ofits ACN fees would be paid to Amazon not in cash but in
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3 form ofrestricted equity ofits ACN partners. Instead, defendants frequently misstated that
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the ACN fees would be paid in cash and republished these misstatements through the
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Underwriter's research reports and through other public sources described herein. Such
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republished misstatements were based on Amazon's statements, and prepared at Amazon's
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8 direction.
9 10. This was a material omission and/or material misstatement because, as became evident at the
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end ofthe Class Period, a material portion ofthe purported revenue stream from the ACN
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partners was in the form ofrestricted (i.e., non-saleable) equity, not cash.
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11. The purported benefits to Amazon ofits ACN revenues and their high margins were
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14 prominently disclosed by defendants and their agents. Nevertheless, defendants never
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disclosed during the Class Period that Amazon's ACN fees were to be paid in anything other
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than cash. Nor did they attach the ACN agreements themselves as exhibits to Offering
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Documents so thatthe terms ofsuch contracts could be reviewed by the public Failure to
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annex such material contracts was a negligent violation ofSecurities Act disclosure
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20 requirements.
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12 At the time ofthe Offering, Amazon's ACN revenue stream was ofcrucial importance to
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PEACS investors because, as represented by defendants and their underwriters, such revenue
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stream was a source ofnearly $500 million dollars ofpureprofit. This additional purported
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25 profit reinforced Amazon's previous statements that it could overcome its operating losses
26 and service its debt, including its bonds. When the true nature ofthe ACN revenue stream
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began to emerge, and as it became more evident that the value ofthe ACN stock
28
McKay Chadwell, PLLC
LEAD PLAINTIFF'S FIRSTAMENDED COMPLAINT -CLASS ACTION
701 Fifth Avenue, Suite7201
(COI-0640L)- 5 Seattle, Washington 98104
Cr1CLIENTS10133710011PLEADINGS\FISTAMBNDEDCOMPLAINT 213LDDOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 6 of 127
consideration would fall drastically short ofwhat had been disclosed in February of2000,
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Amazon's attractiveness from a debt investor's perspective diminished along with its ability
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3 to make its debt payments, and the PEACS prices suffered material declines.
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13. At no time prior to the Offering was it disclosed in the Offering Documents or otherwise that
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the $362.5 million to $500 million purportedly to be received by Amazon under the ACN
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agreements consisted merely ofdefendants' valuation ofrestricted equity to be distributed to
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8 Amazon. Accordingly, at no time prior to the end ofthe Class Period did PEACS purchasers
9 know that Amazon's supposed ACN "high-margin revenue" actually consisted mostly of
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speculative restricted shares ofstock in a series ofstart-up internet companies.
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14. Each ofthe Offering Documents pursuant to which the PEACS were offered omitted to
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disclose that ratherthan being paid in cash under its ACN agreements, Amazon would in fact
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14 be paid in restricted equity This omission occurred despite the fact that disclosure ofthe
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material terms ofthe ACN agreements, including the form ofpayment thereunder, was
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required pursuantto Schedule A ofthe Securities Act and Rule 408 ofthe Securities Act.
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15. Under Item 601 ofRegulation S-K, which sets forth disclosure requirements for registration
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statements, all "material contracts" ofan issuer must be annexed as exhibits to aregistration
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20 statement for the offering ofsecurities In that the agreements between Amazon and its
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partners inthe ACN purported to provide Amazon with between $362.5 million and $500
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million in high-margin revenues over a five year period, such agreements were "material
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contracts" ofAmazon within the meaning ofItem 601 which should have been annexed to
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25 the Registration Statements and Prospectuses for the Offerings.
26 16. Rule 408 ofthe Securities Act Rules requires all registration statements to contain, in
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addition to the information expressly required to be included, all "further material
28
McKay u Su,PL72L0C
LEAD PLAINTIFF'S FIRST AMENDED COMPLAINT- CLASS ACTION 701 FifthAvvenue,,3u 7201
(CO1-0640L)- 6 Seattle,Washington98104
GICLIENTS10133711t011PLEADINGS%FISTAMENDEDCOMPLA1NT2,P!DDOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 7 of 127
information, ifany, as may be necessary to make the required statements, in the light ofthe
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circumstances in which they are made, not misleading." The fact that the lion's share ofthe
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3 $362.5 million to $500 million claimed by Amazon as revenue commitments from its
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partners in the ACN was to be paid in the form ofrestricted equity rather than cash
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constituted such "further material information" required to be disclosed in the Offering
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Documents for the PEACS within the meaning ofRule 408.
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8 17 Additionally, Schedule A ofthe Securities Act 15 U.S C. § 77aa(28), expressly requires
9 issuers to annex copies ofmaterial contracts to a registration statement. Defendants
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negligently failed to comply with this statutory requirement and there is no express or
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implied exceptionto this statute in any SEC regulation or otherwise.
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18. Because the agreements between Amazon and its partners in the ACN, as representedby
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14 defendants in the Offering Documents andelsewhere, represented a significant contribution
15 to Amazon's revenue stream and provided a crucial element ofhigh-margin revenue to shore
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up Amazon's bottom line, defendants' statements complained ofherein constituted material
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untrue statements and omissions to purchasers ofthe PEACS. The ACN revenue stream was
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not -- as defendants represented -- ahigh-margin flow of$362 5 to $500 million dollars, but
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20 rather an inherently-unstable stream ofrestricted, speculative shares in Amazon's ACN
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partners.
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19. Moreover, in the subject Registration Statement, Amazon negligently misrepresented the
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drugstore com transaction, overstating themaximum revenue to be received thereunder. In
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25 particular, inthe Registration Statement atpp S5-S6, Amazon described the transaction as
26 involving the receipt of"$105 million over athree-year period" and "a $30 million
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investment" by Amazon in drugstore.com In fact, the transaction involved only a maximum
28
McKayChadwell, PLLC
LEAD PLAINTIFF'S FIRSTAMENDED COMPLAINT-CLASS ACTION
701 FifthAvenue,Suite7201
(COI-0640L)- 7 Seattle,Washington98104
G1CIENTS10133'n0011PLEADINGS\FJSTAMENDEDOOMPLAWT2PLD.DOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 8 of 127
payment to Amazon of$75 million, not $105, million because the $30 million investment
1
made by Amazon was immediately repaid (i.e., returned) to Amazon by drugstore.com as
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3 "prepayment" ofits first five quarterly payments under its ACN agreement. Thus, in effect,
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drugstore.com never had the obligation to pay Amazon $105 million. In recognition of
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Amazon's disclosure error, drugstore.com made a curative disclosure with respect to this
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transaction in its own lOQ filed June 2000, acknowledging that the deal included $30 million
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8 ofstock and only up to $75 million ofcash Amazon, however, made no such curative
9 disclosure. In addition to misrepresenting the nature ofits ACN revenue, Amazon also
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specifically misrepresented the aggregate consideration to be received from drugstore.com.
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20. At some point priorto February 2000, Amazon retained Morgan Stanley Dean Witter,
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Donaldson Lufkin & Jenrette and Credit Suisse First Boston (and/or their affiliates)
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14 ("Underwriters") to act as underwriters for the placement ofthe PEACS. After such
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retention, and priorto Amazon's filing ofthe Prospectus Supplement with respectto the
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PEACS Offenng, Amazon and the Underwriters engaged in sales activity which violated
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Section 5 ofthe 1933 Act and Section 12(a)(1) ofthe Securities Act by publishing at least six
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highly bullish research reports with respect to Amazon. See Exhibits A- G. Each such
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20 report contained repetitive and bullish comments with respect to Amazon's prospects Such
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reports did not qualify forthe safe harbor provided pursuant to the 1933 Act because they
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were not "distributed with reasonable regularity" in that they and other similarAmazon
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reports were not published in accordance with or on a reasonably regular schedule, but
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instead were published adhoc for the purpose ofconditioning the market for the PEACS
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26 sale.
27
28
McKayChadwell, PLLC
LEADPLAINTIFF'S FIRSTAMENDED COMPLAINT-CLASS ACTION 701 FifthAvenue, Suite7201
(Col-0640L) - 8 Seattle,Washington98104
G1CL1ENTS101337\0011PLEADINGSIFISTAMENDEDCOMPLAI T2.PLDDOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 9 of 127
21 The reports constituted aprospectus, as defined in Section 2(a)(10) ofthe Securities Act, but
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did not comply with the requirements ofSection 10 ofthe Securities Act (15 U.S.C. §77j)
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3 and were thus distributed in interstate commerce in violation ofSection 5(b)(1) ofthe 1933
4
Act and Section 12(a)(1) ofthe 1933 Act.
5
22. Each such report was used by Amazon to "offer for sale" or to "offer to sell" the PEACS
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within the meaning ofSection 2(a)(10) ofthe 1933 Act and Section 5(c) ofthe 1933 Act,
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8 which prohibit the making ofoffers to sell a security prior to the filing ofa registration
9 statement with respect to such security. Because the Prospectus Supplement describing and
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offering the PEACS was not filed until February 7, 2000, these offers, pursuant to these
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prospectuses, constituted "gundumping" in violation ofSection 5(c) ofthe Securities Act
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Section 12(a)(1) ofthe Securities Act
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14 23. The information published in the reports was, according to subsequent disclosures made by
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the analysts who published them (Le , Mary Meeker), provided to the analysts by Amazon
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itselfwith knowledge and direction that such information would and should be incorporated
17
into published reports
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24. The fact that Amazon senior management instructed and directed Meeker and other analysts
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20 to make these disclosures in violation ofSection 5 ofthe 1933 Act and Section 12(a)(1) of
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the 1933 Act was hidden from investors and not disclosed until Meeker admitted these facts
22
in an interview with Mark Veverka ofBarron's Magazine published on or about October 30,
23
2000. See Exhibit 1, annexed hereto the "October 30 Article "
24
25 25. Prior to the October 30 Article, there was no disclosure ofAmazon's role in this
26 sales activity and no factual basis upon which aplaintiffcould plead gun-jumping or a
27
violation ofSection 12(a)(1) by Amazon. Amazon failed to make such disclosure even
28
McKay Chadwell,PL.LC
LEAD PLAINTIFF'S FIRSTAMENDEDCOMPLAINT -CLASS ACTION 701 FifthAvenue, Suite7201
(Cal-0640L) - 9 Seattle, Washington98104
G1CLIENPS10133710011PLEADINGSIFISTAMENDEDCOMPLAINr2PIADOC [phone] Fax[phone]
Case 2:01-cv-00640-RSL Document 52 Filed 04/08/2002 Page 10 of 127
though itwas required pursuant to Item 508 ofRegulation S-K (requiring disclosure of"Plan
1
ofDistribution") to disclose such sales activities and plans to condition the market in the
2
3 Registration Statement. By failing to disclose such market conditioning activity as part ofits
4
plan ofdistribution in the Registration Statement, Amazon affirmatively concealed it gun-
5
jumping in violation ofits statutory disclosure obligations. The failure to disclose was self-
6
concealing in that, absent the October 30 Article, Plaintiffcould not have known that
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8 Amazon had directed the disclosures made by Meeker and the other analysts in violation of
9 Section 5. Accordingly, the statute oflimitations for defendants' violations should be
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equitably tolled inasmuch as in the exercise ofreasonable diligence, Plaintiffcould not have
11
known ofdefendant's violation ofSection 5 until, at the earliest, October 30, 2000. Absent
12
equitable tolling, a defendant would have an improper incentive to avoid proper disclosure
13
14 underthe Securities Act in order to avoid Section 5 gunjumping liability
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26. On or about October 24, 2000, Amazon issued apress release disclosing that the SEC had
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commenced an informal inquiry with respect to Amazon's accounting treatment and
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disclosure for some ofits initial ACN transactions
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27. By the acts, transactions and courses ofconduct alleged herem, defendants violated the 1933
19
20 Act as alleged herein.
21
JURISDICTION AND VENUE
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28 This action arises under §§ 11, 12, and 15 ofthe Securities Act of 1933 (the "1933 Act"), 15
23
U.S.C. §§ 77k, 771, and 77o.
24
29. This Court hasjurisdiction in this actionpursuant to Section 22(a) ofthe Securities Act of
25
26 1933, 15 U.S.C. § 77v(a) and 28 U.S.C. §§ 1331 and 1337; and pursuant to 28 U.S.C. §
27
1367.
28
McKayChadwell, PLLC
LEADPLAINTIFF'S FIRSTAMENDED COMPLAINT-CLASS ACTION
701 FifthAvenue,Suite7201
(COI-0640L) - 10 Seattle,Washington98104
Cr\CLIENTS10133714811PLEADINGS\FISTAMENDEDCQMPLAINT2.PLDDOC [phone] Fax[phone]