MEMORANDUM OPINION AND ORDER
INTRODUCTION
Pending before the Court are three related suits brought against IAC/InterActi-veCorp (“IAC” or the “Company”) and certain directors and high-ranking officers. Plaintiffs in the first suit represent an uncertified class of investors who purchased or otherwise acquired IAC publicly traded securities between March 31, 2003, to August 3, 2004 (“class period”), including former shareholders of companies whose stock was exchanged for IAC stock. The other two suits are shareholder derivative actions that the Court has consolidated with the class action suit for pretrial purposes. The gravamen of both the Consolidated Amended Class Complaint (“Class Complaint” or “CC”) and the Verified Consolidated Shareholder Derivative Complaint (“Derivative Complaint” or “DC”) is that, during the class period, defendants inflated the price of IAC’s stock by making materially false and misleading statements or omissions regarding the health of IAC’s travel business, thus enabling IAC to maximize the value of its stock in the stock-for-stock acquisitions of LendingTree, Expedia, and Hotels.com, and permitting certain individual defendants to benefit by selling 7.78 million shares of their IAC stock for proceeds of $258.9 million.
1
Following the release of IAC’s second-quarter 2004 earnings, IAC’s
Defendants have moved to dismiss the Class Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and have moved to dismiss the Derivative Complaint pursuant to Rule 23.1 for failure to make demand on IAC’s board of directors. For the reasons set forth below, the Court grants defendants’ motions [68] and [69], thereby dismissing both Complaints in their entirety.
BACKGROUND
1. The Parties
Class plaintiffs are IAC shareholders who purport to bring claims on behalf of a putative class of shareholders who purchased or otherwise acquired shares of IAC between March 31, 2003 and August 3, 2004. (CC ¶¶ 14-19.) Derivative plaintiffs Lisa Butler and Stuart Garber likewise allеge to be owners and holders of IAC common stock. (DC ¶¶ 21-22.) Derivative plaintiffs assert factual allegations identical to those made in the Class Complaint. (Compare CC ¶¶ 40-94 with DC ¶¶ 56-108.)
IAC, a Delaware corporation headquartered in New York City, sells goods and services over the internet. (CC ¶¶ 20, 32; DC ¶ 6.) IAC’s strategy during the class period was to become a multi-brand interactive commerce company. (CC ¶¶ 2, 45; DC ¶¶23, 60.) IAC was organized into eight divisions, namely Travel (Expedia, Hotels.com, Hotwire, Interval International, and TV Travel Shop), Electronic Retailing (HSN, a home shopping service), Ticketing (Ticketmaster and ReserveAmeriea), Personals (Match.com), Financial Services and Real Estate (LendingTree.com), Tel-eservices (Precision Response Corporation), Local and Media Services (Citys-earch, Evite, Entertainment Publications, Inc. and TripAdvisor, Inc.), and Interactive Development (ZeroDegrees). (CC ¶¶ 2, 32; DC ¶ 6.) Prior to being spun off into a separate public company in August of 2005, the travel business was IAC’s largest operating segment. (CC ¶ 32; DC ¶ 6.) In fiscal year 2003, IAC sold over $10 billion in travel services, and Travel alone provided seventy percent of the Company’s net income during the first six months of 2004. (CC ¶ 32; DC ¶ 6.)
The following are the officers and directors who are named as individual defendants in the Class Complaint: Barry Diller, Victor A. Kaufman, Dara Khos-rowshahi, Julius Genachowski, Richard N. Barton, Erik C. Blachford, Robert R. Bennett, Edgar Bronfman, Jr., Donald R. Keough, Mariee-Josée Kravis, John C. Malone, Gen. H. Norman Schwarzkopf, Alan Spoon, and Diane von Furstenberg. (CC ¶¶ 21-31.) The Class Complaint alleges that all of the individual defendants, with the exception of Genachowski and Blachford, signed allegedly false and misleading registration statements pursuant to IAC’s acquisitions during the class period.
(Id.
¶¶ 30-31.) Barry Diller is the chief executive and chairman of the Company.
(Id.
¶ 21.) Victor A. Kaufman is vice chairman “of the Board of Directors,”
2
and he served previously as chairmаn of the Company and as its chief financial officer.
(Id.
¶ 26.) At the time that the Class Complaint was filed, Dara Khosrowshahi was IAC’s chief financial of
The Derivative Complaint names all of the individuals described above, with the exception of Blachford, and in addition names the following individuals as defendants: Steven Rattner, a director of IAC since April 2004; Anne M. Busquet, a director of IAC at all relevant times until May 2003; and Jean-Renee Fourtou, a director of IAC at all relevant times until June 2003. (DC ¶¶ 24-40.)
II. Allegations of Wrongdoing
The following allegations are set forth in the Complaints and are accepted as true for purposes of these motions to dismiss.
Cooper v. Parsky,
During the class period, IAC’s goal was to become the world’s largest and most profitable interactive commerce company by pursuing' a multi-brand strategy. (CC ¶ 45; DC ¶ 60.) IAC grew through aequi-sitions. (CC ¶ 35; DC ¶ 9.) Prior to the class period, the Company purchased controlling interests in Ticketmaster and Ex-pedía and acquired substantially all of the assets of the two entities that operated Hotels.com’s websites. Id. During the class period, IAC acquired LendingTrеe as well as the shares that IAC did not already own in Expedia and Hotels.com in stock-for-stock transactions. (CC ¶¶ 40, 44, 48; DC ¶¶ 56, 59, 63.) On September 22, 2003, IAC announced the purchase of Hotwire, a discount travel website founded by Texas Pacific Group and American Airlines, America West Airlines, Continental Airlines, Northwest Airlines, United Airlines, and USAirways. (CC ¶¶ 65-67; DC ¶¶ 79-82.) The Company also announced the formation of a single travel division, IAC Travel, that would include Expedia, Hotels.com, Interval International, TV Travel Shop, and Hotwire. (CC ¶¶ 2, 25; DC ¶ 6.)
On November 5, 2003, IAC announced in its Form 8-K filed with the Securities and Exchange Commission (“SEC”) that its earnings projection for full-year 2004— measured as Operating Income Before Amortization (“OIBA”), IAC’s principal profitability metric — was “in the range of $1.0 billion to $1.2 billion.” (Form 8-K, Exhibit 99.3 (Nov. 5, 2003) (Defs.’ Mot. to Dismiss the Class Complaint (“Mot. Dismiss CC”), DiPrima Ml Ex. 6); CC ¶ 69; DC ¶ 83). On the quarterly analyst call following this earnings release, Diller stated that “we believe we will continue to have strong growth over the next years” and that “we do know at least enough about next year to tell you that our best guess is that our operating income, before amortization ... ought to be between $1 billion and $1.2 billion.” (CC ¶ 70; DC ¶ 84.) Management repeated this projection at its November 11 “Investors Day” conference. (CC ¶¶ 74-76; DC ¶¶ 88-90.)
During the class period, IAC Travel’s subsidiaries acted primarily as intermediaries between suppliers and consumers by aggregating travel-related products such as hotel rooms and airline tickets and selling them over the internet. (CC ¶ 32; DC ¶¶ 6, 23.) For example, Hotels.com contracted with major hotel chains for nonexclusive rights to sell hotel room bookings for the hotel chains in exchange for a fee. (CC ¶ 33; DC ¶ 7.) A customer reserving a hotel room on Hotels.com’s website paid Hotels.com directly; Hotels.com then paid a pre-negotiated price to the hotel chain for that room. Hotwire worked similarly: the hotel and airline partners permitted Hotwire to access their unsold inventory of hotel rooms and airline seats for sale at discounted prices. Expedia, on the other hand, bought rooms wholesale and then marked them up for sale at retail prices. (Id.)
Because of IAC Travel’s role as an intermediary, its business model depended on the ability of its subsidiaries to obtain a favorable supply of hotel rooms and airline seats. Plaintiffs allege, however, that during the class period, IAC concealed significant supply problems within its travel business. (CC ¶¶ 9(a), 97(a); DC ¶¶ 15, 109.) Specifically, class plaintiffs allege that “defendants made false statements ... affirmatively misrepresenting and concealing that (i) IAC lacked long-term contracts with airlines; (ii) the supply of hotel rooms for IAC was being reduced due to disputes with hotel chains, the hotel chains’ improved on-line offerings and the hotel chains’ increasing ability to fill rooms; and (iii) customer demand for IAC’s hotel rooms was shrinking because of overbilling disputes and the ability to get the same rates by going directly to the hotel chains’ sites.” (CC ¶ 3.) The Court now sets forth plaintiffs’ allegations in more detail, treating the alleged dissatisfaction of hotel chains and customers together.
1. Airplane Seats
During the class period, Hotwire had difficulty obtaining access to airlines’ unsold inventory of airplane seats at discounted prices — a problem that defendants allegedly failed to disclose until the close of the class period. (CC ¶¶ 87-89; DC ¶¶ 101-103.) Plaintiffs conclude from this fact that Hotwire lacked enforceable, long-term volume and pricing agreements with Hotwire’s founding airlines. (CC ¶ 9(k); DC ¶ 109(k).) Such agreements were necessary, plaintiffs argue, to ensure that the airlines continued to provide an ample supply of discounted seats to Hotwire after IAC’s acquisition of Hotwire in 2003. (CC ¶ 67; DC ¶ 82.) “This was particularly true since American Airlines, Continental Airlines, Northwest Airlines, United Airlines, and Delta Airlines operated Orbitz,” a competing discount travel site established in 2001. (Id.) Becausе IAC lacked such agreements, Hotwire’s founding airlines were able to shift business away from IAC Travel by selling tickets through their own websites, or through Orbitz and other discount websites. (Pis.’ Opp’n to Mot. Dismiss CC (“CC Opp’n”) 4.)
2. Hotel Rooms
IAC’s hotel business, like its air travel business, depended on obtaining access to unsold inventory at discounted prices. As reported by “former IAC employees,” however, during the class period IAC experienced infrastructure problems and engaged in a variety of “bad business practices” that damaged its relationships with suppliers and customers and eventually caused a decline in its supply of hotel rooms. (CC ¶¶ 9(a), 97(a); DC ¶ 109.)
For example, plaintiffs allege that certain customers were double-billed for hotel rooms purchased on the Company’s web
According to plaintiffs, hotel chains were equally unhappy. (CC ¶¶ 9(a)(i)-(iv), 97(a)(i)-(iv); DC 1ffl58(a)-(d), 109(a)-(d).) Hotel chains were dissatisfied with the Company’s practice of representing on its websites that a particular hotel’s rooms were sоld out when in fact rooms were still available through other venues, such as the hotel’s own website. (Id.) Plaintiffs also allege, based on information obtained from unidentified “former employees,” that IAC held up payments to hotel chains in order to overstate its cash position, “thereby eroding any remaining goodwill between the Company and its suppliers.” (CC ¶¶ 9(c), 43(0, 97(c); DC ¶¶ 58(c), 109(j).) Exacerbating supply problems was the fact that many hotel chains had launched their own websites where customers could book rooms. (CC ¶¶ 9(h), 97(h); DC ¶ 109(o).) These factors, together with customer dissatisfaction, allegedly led hotel chains to limit the supply of rooms that they made available to the IAC Travel’s subsidiaries, or to abandon their relationships with IAC altogether.
Most of plaintiffs’ allegations regarding hotel and customer dissatisfaction are described generally, but they do provide one specific example of a hotel chain that was dissatisfied with IAC. In early 2003, IAC’s subsidiary Expedia entered an agreement to promote hotels owned by the InterContinental Hotels Group, which owns the hotel brands InterContinental Hotels and Resorts, Crowne Plaza, and Holiday Inn, among others. (CC ¶ 39.) By April 2004, however, InterContinental was displeased with IAC primarily because Expedia and Hotels.com: failed to clearly present fees to customers, instead lumping together fees and taxes; showed InterContinental’s rooms as “sold out” when the websites had merely exhausted their allocation of discount rooms, diverting potential sales to other hotels; and transmitted reservations via fax that had to be reentered manually into the hotel’s reservation system. (CC ¶¶ 80, 90; DC ¶¶75, 94.) Following the close of the class period, on August 16, 2004, InterContinental announced that it would be terminating its relationship with IAC Travel. (CC ¶ 90; DC ¶ 104.)
Finally, the Complaints allege that the Company understated its tax liabilities by paying state and local occupancy taxes based on the wholesale rate remitted to the hotel chains rather than at the higher retail rates paid by customers. (See CC ¶¶ 60-64; DC ¶¶ 75-78.)
3. Accounting Practices
The Complaints also allege in the most general terms that the Company’s manipulations of revenues and cash flows — resulting, for example, from overbilling and cancellations — rendered IAC’s reported financial results false and misleading.
(See,
Despite these allegations, class plaintiffs devoted only a single footnote in their opposing papers to this issue (see CC Opp’n 7 n. 4), and at oral argument, counsel for class plaintiffs stated that they are not asserting a claim that the financial statements were false or that the Company failed to comply with GAAP [Generally Accepted Accounting Principles] (see Oral Argument Tr. 10, Oct. 12, 2006.). Accordingly, the Court considers any claims regarding the truthfulness of the Company’s reported financial statements to have been abandoned by class plaintiffs.
C. Defendants’ Trades
Plaintiffs allege that IAC concealed its supply problems during the class period, causing IAC’s stock to trade at artificially inflated levels. (CC ¶¶ 4, 95; DC ¶¶ 11, 50, 52.) In early 2003 IAC was trading below $25 per share, but on July 7, 2003 IAC’s share price reached a class-period high above $40 per share. (CC ¶¶ 6, 10, 92; DC ¶¶ 17, 55, 106.) The inflated share price allegedly benefited IAC by permitting it to maximize the value of its stock in the stock-for-stock acquisitions of Len-dingTree, Expedia, and Hotels.com. (CC ¶¶ 4, 95; DC ¶¶ 11, 52.) In addition, certain individual defendants allegedly benefited from the inflated share price by selling 7.78 million shares of their IAC stock for proceeds of $258.9 million. (CC ¶¶ 10, 29, 95; DC ¶¶ 55, 111.) Specifically, defendant Diller sold 5,329,000 shares worth $177,649,570 in three transactions dated May 7, -2003, June 3, 2003, and February 13, 2004. (CC ¶ 95; DC ¶ 111.) The largest of these transactions by far was the May 7, 2003 transaction, in which Diller sold 4,500,000 shares worth $147,250,350. Id. Barton sold 1,256,350 shares worth $40,626,787 in regularly scheduled transactions of 20,000 or 28,150 shares per week between August 14, 2003 and July 29, 2004. Id. Genachowski sold 327,499 shares worth $8,230,235 between May 7, 2003 and January 14, 2004; Kaufman sold 842,862 shares for $28,328,785 between May 7, 2003 and February 10, 2004; and Khos-rowshahi sold 120,514 shares worth $4,159,267 between May 29, 2003 and December 24, 2003. Id. Defendants also caused IAC to repurchase 62 million shares of its stock on the open market. (CC ¶ 4; DC ¶ 11.) 3
D. Alleged Disclosures at the Close of the Class Period
Plaintiffs allege that defendants made a number of disclosures at the close of the class period. On August 3, 2004, IAC issued its second quarter 2004 earnings release in which it disclosed that its quarterly net income had fallen twenty-five
[I]f you dig deep into this of course, there are some supply issues, and, of course, the second quarter was probably the deepest cut of it. Certainly internationally where all travel was down and is beginning I think to rebound. But other than that and other than Hotwire, which is definitely a significant issue, we don’t think, again, it’s structural. We don’t think it’s long term. We think that the supply issues that we have had that have given us a lesser discounts as the year progresses, we don’t think it’s going to come back fast, but we definitely think it will come back.
(CC ¶ 87 (emphasis added); DC ¶ 101.) Plaintiffs allege that this statement and the announcement that “revenues were well short of analyst expectations” made “it evident that the defendants’ prior statements that the Travel business was ‘on track’ were false.” (CC ¶ 88; DC ¶ 102.) Defendants also announced that 2004 earnings were expected to come in at $1.0 billion, the low end of the projected range. 4
IAC’s stock price declined on this news by sixteen percent or $4.23 per share, from $27.03 per share at close on August 3, 2004 to $22.80 at close on August 4, 2004. (CC ¶ 88; DC ¶ 102.) On August 5, Diller sent an e-mail to IAC employees in which he recognized that the announcement that IAC expected earnings for 2004 to come in at the lower end of the range projected in November 2003 had disappointed the market, causing the stock to drop:
We said on the call that it was a good quarter, and it was. What wasn’t good is that we, your management, raised expectations too high at our Investor Day last November and are now paying the price. Added to that, and I do believe inappropriately, I was far too defensive in replying to analysts’ questions.... All of these are true but the higher truth is we did disappoint the estimates for growth set by our own hands and by not lowering them earlier in the year as the strain became clear we mightily exacerbated the problem. That, and the extremely jittery markets of the last months did the rest_[T]he responsibility for- this, allowing the bar to be set unreasonably high, and then not having ■ the proper patient focus on our conference call, is fully mine.
(CC ¶ 7; DC ¶ 18.) Plaintiffs argue that in this e-mail “Diller conceded he had overstated the Company’s then-existing business operations and status in earlier statements and gave too bullish guidance at an investor and analyst conference in November 2003, which he admitted misled investors.” (Id.) The final alleged disclosure was InterContinental’s announcement that it would be terminating its relationship with IAC Travel. (CC ¶ 90; DC ¶ 104.)
. Ultimately, IAC met its earnings projection for 2004, reporting earnings of $1.02 billion, within the range of $1.0 to $1.2 billion forecasted in November 2003.
(See
DISCUSSION
I. Defendants’ Motion To Dismiss The Class Complaint
A. Section 10(b) and Rule 10b-5 Claim Against All Class Action Defendants
Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, prohibit fraudulent activities in connection with securities transactions. Section 10(b) prohibits the use of “manipulative or deceptive” practices in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b). Rule 10b-5 presents specific practices that are considered “manipulative or deceptive” and provides that “it shall be unlawful ... to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).
To state a claim for securities fraud under Section 10(b) and Rule 10b-5, “a plaintiff must allege that the defendant knowingly or recklessly made a false or misleading statement of material fact in connection with the purchase or sale of a security, upon which plaintiff reasonably relied, proximately causing his injury.”
Kowal v. MCI,
A court may not dismiss a complaint under Rule 12(b)(6) “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”
Bernheim v. Lift,
any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit.
Rothman v. Gregor,
While the rules of pleading in federal court usually require only “a short and plain statement” of the plaintiffs claim for relief, Fed. R. Civ. Proc. 8, aver-ments of fraud must be “stated with particularity,” Fed. R. Civ. Proc. 9(b). In securities cases where the plaintiff alleges that a defendant made an untrue statement of a material fact or omitted to state a material fact, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) imposes additional pleading requirements: the complaint must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). “The Second Circuit evaluates a securities complaint’s compliance with Rule 9(b) and the PSLRA by means of a common formulation. ‘A complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.’ ”
In re Marsh & McLennan Companies, Inc. Sec. Litig.,
No. 04 Civ. 8144(SWK),
1. False and Misleading Statements
As an initial matter, the Court rejects any claim that IAC’s earnings projection for 2004 of “$1.0 billion to $1.2 billion” was false or misleading or that defendants are liable because IAC failed to meet earnings projections. Although plaintiffs do not squarely allege that IAC’s earnings guidance was fraudulent, plaintiffs complain that IAC “gave too bullish guidance at an investor and analyst conference in November 2003” (CC ¶ 7) and attempted “to assure investors of IAC’s value and performance and continued substantial growth” while at the same time concealing adverse information (CC ¶ 112). However, IAC’s statements about its prospective performance were accompanied by cautionary language. “Such language brings into play the ‘bespeaks caution’ doctrine. Under the ‘bespeaks caution’ doctrine, ‘courts have held that meaningful cautionary language can render omissions or misrepresentations immaterial.’ ”
In re Duane Reade Inc. Sec. Litig.,
No. 02 Civ. 6478(NRB),
Plaintiffs have not alleged that defendants issued the earnings guidance with actual knowledge that it was false or that the guidance itself misrepresented present facts.
See Goplen v. 51job, Inc.,
feeling more competition from hotel chains, large, medium-sized, and from other online travel sites trying to replicate our success. Travelocity, Orbitz, and from the hotels themselves, are all being competitive, getting smarter about using the Internet, and it’s resulted in, of course, more more [sic] aggressive pricing online and more aggressive marketing trends.
(DiPrima Aff. Ex. 7, at 3.) Similarly, when IAC reconfirmed its earning guidance in an analyst conference call on February 9, 2004, Diller said:
[W]e are here to reconfirm our range of 1 billion to 1.2 billion in OIBA. We’ve told you our goal is to deliver almost 3 billion by 2008, which is growth of nearly 30% a year. We can’t tell you what’s going to happen in any particular quarter or year, but we do think it’s going to range between 25 and 35%.
Now, these crystal ballings aren’t, of course, worth the air they’re written on. No one can predict the future. But it is our honest guess, based upon everything we know.
(Tr. Q4 2003 Earnings Call, at 2 (Feb. 9, 2004) (DiPrima Aff. Ex. 11)). The Court finds, therefore, that the cautionary language used in connection with IAC’s earnings guidance renders it inactionable. “The securities laws do not require that investors be treated like children ... investors know that the stock market is a risky business and that when a company’s officer makes predictions ... they are not issuing guarantees.”
Duane Reade,
The Court now turns to the core allegation of the Complaint, which presents the more nuanced claim that the sixteen-percent drop in share price is attributable, not to IAC’s revised earnings projection,
6
but to the disclosure on August 3, 2004, that IAC Travel was having “supply issues.” (CC ¶ 87;
See
CC Opp’n 13; Oral Argument Tr. 9, Oct. 12, 2006.) Specifically, plaintiffs allege that defendants violated the federal securities laws by misrepresenting current facts, including “IAC’s supply of airplane seats and hotel rooms, [and] its relationships with its suppliers and customers.... ” (CC ¶ 3; CC Opp’n 13.) Under Rule 9(b) and the PSLRA pleading standards, plaintiffs must do more than allege that various statements made by defendants were false or misleading: “they must demonstrate with specificity why and how that is so.”
In re Open Joint Stock
a. Airplane Seats
The first category of false or misleading statements alleged by plaintiffs concerns the duration of the founding airlines’ contracts with Hotwire. On September 22, 2003, IAC announced that it would acquire Hotwire for $665 million in cash, but the press release omitted any mention of the type of contracts that Hotwire had with its founding airlines. (CC ¶¶ 65-68.) On November 5, 2003, IAC completed the acquisition. (See Press Release, IAC/In-terActiveCorp, IAC Reports Q3 2003 Results (Nov. 5, 2003) (cited by CC ¶ 69).) On the earnings conference call that same day, an analyst asked Diller what effect the purchase of Hotwire would have on contracts between Hotwire and its founding airlines. The following exchange took place:
DARYL SMITH, ANALYST, JP MORGAN: Good morning. On the Hotwire side of the equation, traditionally [sic] benefited from preferential pricing associated with their close connection with airline suppliers. With airlines now liquidating their investment when can we anticipate that their existing pricing contracts roll off and when do you think you’d expect financial impact of that on the business? I have a follow-up question as well.
BARRY DILLER: I’m sorry, forgive me. If you just repeat the last part of your questions, cross talk here and I couldn’t hear it.
DARYL SMITH, ANALYST, JP MORGAN: If you look at the airlines now liquidating their investment what’s the potential impact on the roll off of that pricing contracts and then what’s the impact on your business and when can we anticipate that happening?
BARRY DILLER: I don’t know if there’s any. I think our agreements with airlines are long-term. And, so, I don’t think that it will have any effect. Anybody else here have anything to comment on it? So that’s the answer to that.
(DiPrima Aff. Ex. 7, at 11; CC ¶¶ 69-72.) Plaintiffs allege that Diller’s statement that the “agreеments with airlines are long-term” was materially false and misleading because “Hotwire did not have the long-term pricing arrangements represented and the subsequent decline in Hotwire’s business would be a major contributing
Courts in this district require plaintiffs to sufficiently identify the sources of their information and belief “so as to allow each defendant and the Court to review the sources and determine, at the pleading stage, whether an inference of fraud may be fairly drawn from the information contained therein.”
G-I Holdings v. Baron & Budd,
No. 01 Civ. 0216(RWS),
[I]f you dig deep into this of course, there are some supply issues, and, of course, the second quarter was probably the deepest cut of it. Certainly internationally where all travel was down and is beginning I think to rebound. But other than that and other than Hotwire, which is definitely a significant issue, we don’t think, again, it’s structural. We don’t think it’s long term. We think that the supply issues that we have had that have given us a lesser discounts as the year progresses, we don’t think it’s going to come back fast, but we definitely think it will come back.
(CC ¶ 87 (emphasis added).) Although plaintiffs argue that Clark’s statement is an admission that IAC did not have long-term pricing agreements with airlines, Clark never mentioned the Hotwire contracts, let alone discussed thе terms of those contracts. The most that can be inferred from Clark’s statement is that Hotwire was not getting the same discounts on airline seats that it had previously enjoyed and, as a result, consumers were not making as many airline reservations through Hotwire. Plaintiffs also quote an analyst from Oppenheimer & Co. who said following the conference call that IAC’s “longer-term issues are that they are not getting extra inventory or discounted rates from the airlines.”
(Id.
¶ 89.) However, this statement provides plaintiffs with no more evidence of the terms of the Hotwire contracts than Clark’s statement.
7
As the Complaint provides no facts to support plaintiffs allegation that defendants “affirmatively misrepresented] and concealed] that IAC lacked long-term contracts with airlines”
b. Hotel Rooms
Plaintiffs also allege that certain statements regarding IAC’s relationships with hotel chains and customers were misleading because those statements cast IAC’s hotel business in a positive light, when in fact the “entire supply and demand structure of that segment [was] evaporating.” (CC Opp’n 23-24.) Although the Class Complaint complies with the first three requirements of the PSLRA by specifying the statements that plaintiffs contend were fraudulent, identifying the speaker, and stating where and when the statements were made, the Complaint fails to comply with the fourth requirement of the PSLRA, that the complaint “explain why the statements were fraudulent.”
Stevelman,
Plaintiffs argue that two statements made by defendants regarding IAC’s hotel business were false and misleading. The first statement was made in IAC’s 2002 Form 10-K filed with the SEC on March 31, 2003:
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 maintains 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. 9
(CC ¶ 42.) Plaintiffs likewise claim that the following statement made by Diller on the earnings release conference call on February 9, 2004, was false and misleading:
[W]e believe we can [grow] travel at our stated rates while being good partners to our suppliers and giving the best experience and service to our consumers. It’s really true that we [bring] new customers to our suppliers. And one of our big objectives this year is to have all of our supply partners realize that and for us to really work to smooth out every working relationship that we have.We’ve announced an agreement with Marriott last week to distribute their hotels through our merchant program on both Expedia and hotels.com. We now have deals with the five major hotel chains, as well as thousands of different independent hotels and smaller chain operators.
(CC ¶ 78.) The first statement expresses defendants’ belief that its supply contracts and software helped it “accurately monitor its room inventory and provide prompt, efficient customer service,” and the second expresses defendants’ hope that they can continue to grow the travel business “while being good partners to our suppliers and giving the best experience and service to our consumers.” Plaintiffs do not argue that these “ ‘[s]oft,’ ‘puffing’ statements,’ ”
Raab v. General Physics Corp.,
There is ample authority for the proposition that otherwise true, positive statements are rendered misleading when a corporation withholds negative information that would be material to an investor-.
See, e.g., Rombach,
Here, the Class Complaint does not provide specific facts concerning the majority of the alleged bad business practices for the Court to ascertain whether plaintiffs have an adequate basis for alleging that “IAC’s relationship with its hotel suppliers — and thus its ability to secure a supply of hotel rooms to sell — completely fell apart before and during the Class Period.” (CC Opp’n 5.) The Complaint states that information regarding the bad business practices was gathered from unidentified “former IAC employees” and “plaintiffs’ counsel’s investigation.” (CC ¶¶ 9(a), 9(c), 43(i), 97(a), 97(c).) The allegations attributed to former employees are stated in the most general of terms (see, e.g., id. ¶¶ 9(a) (“online customers were being double-billed,” “[cjertain hotel chains were contesting the Company’s slow payment,” “there were large numbers of unhappy consumers who felt they had been over-billed in one way or another”)), without names, dates, places, or other details that might help the Court evaluate whether these employees were actually in a position to know the status of IAC Travel’s relationships with hotel chains and customers. Moreover, the bulk of the allegations are uncorroborated by other facts. For example, plaintiffs have alleged no facts that might corroborate the statements of unidentified former employees that defendants double-billed and overcharged customers, held up payment to hotel chains, or charged rates for hotel rooms that exceeded the hotel’s public prices. (See id. ¶¶ 9, 43, 97.)
The one specified allegation of bad business practices related to the termination of IAC’s relationship with InterContinental Hotels Group. InterContinental publicly complained that Expedia and Hotels.com represented hotels as “sold out” when they were not, and that Expedia and Hotels.com transmitted reservations via fax rather than “guarantee[ing] through аn automated and common confirmation process.”
(Compare id.
¶¶ 80, 90 (InterContinental’s complaints)
with id.
¶¶ 9, 43, 97 (bad business practices).) The discontent of one hotel chain, however, is hardly evidence that the “entire supply and demand structure of that segment [was] evaporating.” Significantly, plaintiffs have not attempted to quantify the impact that InterContinental’s dissatisfaction had on IAC Travel’s profitability during the class period. Further, the Class Complaint itself acknowledges that at the same time that
The Class Complaint also alleges that Diller minimized the significance of the occupancy tax issue, and its affect on IAC’s relationships with hotel suppliers, by making two false and misleading statements. (CC ¶ 101; see also id. ¶¶ 60-64.) First, in a press release issued on August 11, 2003 — shortly after an article about the occupancy tax issue appeared in the New York Times, and nearly a year before the close of the class period — Diller said that “while a limited number of jurisdictions have raised this issue (and the companies are engaged in ongoing dialogue with those jurisdictions), there is simply no basis for the supposition that the companies will face liability in all jurisdictions.” {id. ¶ 61.) Second, an article in the Calgary Herald quoted Diller as saying that IAC “has investigated every aspect” of the tax issue and has “taken an appropriate reserve of $12 million. We think that’s adequate.” (CC ¶ 62.) According to plaintiffs, however, the situation was much more dire, because, “[a]s opposed to the ‘limited number of jurisdictions’ which IAC claimed had raised the issue, IAC was facing the issue nationally.” (CC ¶ 64.)
Given IAC’s regular, meaningful, and specific warnings regarding the issue, however, no reasonable investor could have been misled by Diller’s two statements. For example, IAC’s Form 10-K for 2002 gave a detailed, multi-paragraph warning to investors, stating in part:
Some tax authorities may assert that in some circumstances USA [IAC’s previous name] or its subsidiaries should collect and remit taxes on that part of their charges to customers which represents compensation for booking services. The amount of any tax liability to USA and its subsidiaries on account of this issue would depend on the number of jurisdictions that prevail in assessing such additional tax. Expedia and Hotels.com have not paid nor agreed to pay such taxes and intend to defend their positions vigorously. Should a jurisdiction prevail on such a claim, USA’s subsidiaries may consider limiting liability for future transactions in that jurisdiction by passing on such taxes to the consumer.
(Form 10-K, at 28 (Mar. 31, 2003) (DiPri-ma Aff. Ex. 10).) Similarly, IAC’s Form 10-K for 2003 included an even more explicit warning, that stated in part:
A variety of factors could affect the amount of the liability (both past and future).... IAC notes that there are more than 7,000 taxing jurisdictions, and it is not feasible to analyze the statutes, regulations and judicial and administrative rulings in every jurisdiction. Rather, IACT has obtained the advice of state and local tax experts with respect to tax laws of certain states and local jurisdictions that represent a large portion of IACT’s hotel revenue. In addition, IACT continues to engage in a dialog with and receive feedback from certain state and local tax authorities. IAC will continue to monitor the issue closely and provide additional disclosure, as well as adjust the level of reserves, as developments warrant. The reserve balance at December 31, 2003 is $13.2 million as compared to $10.4 million at December 31, 2002.
(Form 10-K, at 69 (Mar. 15, 2004).) Because IAC repeatedly warned the public that taxing authorities could force IAC to pay back taxes or pay more taxes in the future, further disclosure would not have “significantly altered the total mix of information made available.”
Acito,
Although the Complaint advances other alleged misstatements (CC ¶¶ 44-48, 53, 56, 57-59, 74), none of these are accompanied by particularized facts explaining-why plaintiffs believe that the statements were fraudulent.
See, e.g.,
CC ¶ 44 (“We are convinced that this merger [with IAC] will enhance the growth prospects for Hotels.com....”); CC ¶45 (“[W]e had a great quarter. Travel revenue was up 93% and EBITDA for travel was up 86% over last year. This is despite the war which affected bookings in March and early April.”); CC ¶ 57 (“Our quarter was really very strong, led by the travel and electronic retail. Travel continues to be our big growth engine.”); CC ¶ 75 (“We are investing very aggressively into the growth of the business.”); CC ¶ 78 (“We think that nothing can replace a broad travel site omnibus choice, convenience, and ability to sell packages and multiple components.”). In this respect, the Class Complaint clearly fails to plead with the particularity required by Rule 9(b) and the PSLRA. Moreover, many of the statements merely cite historical facts or express optimism regarding IAC’s future performance and as such are not actionable under the securities laws.
See Rombach,
Finally, it is worth noting that IAC Travel’s financial results are in tension with the allegation that the supply structure was “evaporating.” The Class Complaint itself quotes from a press release summarizing the growth of both IAC and its travel division in the second quarter of 2004, as reported by IAC in its Form 8-K filed on August 3, 2004:
“IAC Travel (“IACT”) increased revenue
on a comparable net basis by 34% to $556 million, operating income by 46% to $129 million
and Operating Income Before Amortization by 29% to $171 million
.... ” (CC ¶ 86 (emphasis added).) IAC Travel enjoyed steady growth after the class period, reporting OIBA growth of 27% in third quarter of 2004, compared to third quarter of 2003
{See
Form 8-K, Ex. 99.1, at 2 (Nov. 3, 2004)); 3% in fourth quarter of 2004, compared to fourth quarter of 2003
{See
Form 8-K, Ex. 99.1, at 2 (Feb. 16, 2005) (DiPri-ma Aff. Ex. 18)); and 32% in first quarter of 2005, compared to first quarter of 2004
In sum, the Court finds that plaintiffs’ allegations do not sufficiently explain how any of the statements made by defendants were misleading. Accordingly, plaintiffs’ Section 10(b) claim is dismissed for failure to state a claim.
C. Section 20(a) Claim
Plaintiffs also assert claims under Section 20(a) of the Exchange Act against IAC and the individual defendants. Section 20(a) claims are necessarily predicated on a primary violation of securities law and impose “control person” liability on individual defendants.
Rombach v. Chang,
D. Section 11 and Section 15 Claims Against IAC, Diller, Khosrowsh-ahi, Barton, Kaufman, and the Director Defendants
Plaintiffs also allege that defendants IAC, Diller, Khosrowshahi, Barton, Kaufman, and the Director Defendants violated Section 11 of the Securities Act in connection with the registration statements filed with the SEC for the Hotels.com, LendingTree, and Expedia mergers. Section 11(a) provides in part,
In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue—
(1) every person who signed the registration statement;
(2) every person who was a director of (or person performing similar functions) or partner in, the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted....
15 U.S.C. § 77k(a). A Section 11 violation is established when “material facts have been omitted or presented in such a way as to obscure or distort their significance.”
I. Meyer Pincus &
Assoc.,
P.C. v. Oppenheimer & Co.,
Here, plaintiffs allege that the registration statements filed with the SEC for the Hotels.com, LendingTree, and Expedia mergers contained “untrue statements of material fact or omitted to state facts required to be stated therein or necessary to
E. Leave to Amend
It is often appropriate for a district court, when granting a motion to dismiss for failure to state a claim, to give the plaintiffs leave to file an amended complaint.
Van Buskirk v. The New York Times Co.,
II., Defendants’ Motion To Dismiss The Derivative Complaint
The derivative complaint, based on state corporate law, makes two alternative arguments about the various defendants. First, plaintiffs allege that the defendants who sold shares of IAC stock during the class period were in possession of material, nonpublic information and traded to their personal advantage using that information. (DC ¶¶ 130-134.) Specifically, these defendants allegedly knew that IAC’s financial prospects were materially overstated, enabling defendants to sell stock at artificially inflated profits to unsuspecting buyers. Second, plaintiffs allege that all of the defendants breached their fiduciary duty to IAC by “caus[ing] the Company to improperly misrepresent the financial prospects of the Company and failed to correct the Company’s publicly reported financial results and guidance.” (Id. ¶¶ 135-40). Based on the same alleged wrongdoing, derivative plaintiffs also bring claims for abuse of control (id. ¶¶ 141-45), gross mismanagement (id. ¶¶ 146-150), waste of corporate assets (id. ¶¶ 151-54), unjust enrichment (id. ¶¶ 155-57), and violation of Section 14(a) of the Exchange Act (id. ¶¶ 159-61).
Defendants argue that if the Court finds, as it has, that the claims in the Class Complaint are not actionable under the federal securities laws, then the Court
A. Plaintiffs’ Allegations of Demand Futility
Plaintiffs concеde that they did not make any demand on the board to institute this action, and allege that such a demand would have been futile. (DC ¶ 111) Plaintiffs allege that demand would have been futile because of the “myriad social and business interrelationships amongst the current and past board members and officers.” (Id. ¶ 114.) In particular, plaintiffs emphasize Diller’s influence over the board: “Diller presently owns approximately 239,000,000 shares of IAC common stock, which represents 60% of the voting rights of the Company. As such, he exerts a virtual control and domination over the Board since, with his vote, he could replace any other member of the highly compensated Board and/or other Company executives.” (Id. ¶ 115.) In addition, plaintiffs claim that the Directors face a substantial likelihood of liability on the underlying claims because they (1) permitted Diller, Barton, Genachowski, and Khosrowshahi to sell their IAC stock “under suspicious circumstances which bore investigation by the Board and/or a special committee of the Board” (Id. ¶ 116); (2) signed misleading proxy statements that resulted in their election to the Board (Id. ¶ 117); and (3) “knew and/or directly benefited from the wrongdoings complained of herein,” including violations of the securities laws (Id. ¶¶ 124-27). Finally, plaintiffs allege that the directors would not initiate a lawsuit against themselves because any insurance policy indemnifying them would not cover their liability were the corporation itself to bring suit against them. (Id. ¶ 128.)
B. Applicable Legal Standards
Plaintiffs’ claims are brought in derivative form on behalf of IAC, of which plaintiffs are shareholders. When shareholders bring “a derivative suit on behalf of the corporation against the directors based on their actions or failure to act, there is a threshold question of standing as to whether the shareholders have made a demand on the board of directors.”
Fink v. Weill,
No. 02 Civ. 10250(LTS),
[t]he complaint shall ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiffs failure to obtain the action or for not making the effort.
Fed.R.Civ.P. 23.1. Because Rule 23.1 requires particularized allegations, the pleading standard is higher than the standard applicable to a pleading subject to a motion to dismiss pursuant to Rule 12(b)(6).
See Fink,
The demand requirements for a derivative suit are determined by the law of the state of incorporation.
Kamen v. Kemper Fin. Servs. Inc.,
Here, the Complaint alleges that a majority of the board either lacked independence or were interested. “Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.”
Aronson v. Lewis,
Where, as here, the board consists of an even number of members, demand is excused when half of the board is properly alleged to be interested or lacking independence.
In re Walt Disney Co. Der. Litig.,
C. Independence
“Independence is a fact-specific determination made in the context of a particular case.”
Stewart,
“[t]here has been some criticisms about this — about our “cozy” board, so to speak, and the fact that I have relationships with them. Well, the truth is, I have relationships with almost everybody ‘cause I’ve been in business a long time.... So, there are very few people, actually, that I don’t know. Now maybe it would be great if I went out and found some dumb strangers to put on our board. But I don’t think it would be the most effective way to manage the company.’ ”
(DC ¶ 122.) Plaintiffs argue that the “myriad social and business interrelationships amongst the current and past Board members and officers” render the directors incapable of independently and disinterestedly evaluating the claims asserted in the Complaint.
Delaware courts have repeatedly held that majority voting power, without more, is not enough to “strip the directors of the presumptions of indepеndence, and that their acts have been taken in good faith and in the best interests of the corporation.”
Aronson,
1. Bronfman, Kravis, and Rattner
Plaintiffs allege that Kravis, Ratt-ner, and Bronfman have been “compromised” by their involvement in “a number
These skeletal allegations do not give rise to an inference that the Kravis’s, Ratt-ner’s, or Bronfman’s independence was compromised. In
Stewart,
Like the complaint in
Stewart,
the Complaint here “does not give a single example of any action by [Bronfman, Kravis, and Rattner] that might be construed as evidence of even a slight inclination to disregard [their] duties as a fiduciary for any reason.”
Id.
at 1047 (quoting
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart,
2. Spoon and Schwarzkopf
Plaintiffs allege that Spoon lacks independence because Diller named Spoon as a director of Ticketmaster.com and Spoon in turn secured Diller a position on the board of the Washington Post. (DC ¶ 123(c).) Plaintiffs allege that Schwarzkopf lacks independence because Diller ar
Allegations that “several of the Board members sit together, in various configurations, on other boards do not call into question the ability of the board members to exercise proper business judgment.”
Halpert Enters.,
3. Keough
The Complaint alleges that Keough lacks independence because (a) he and Diller served together on the boards of The Coca-Cola Company and the Washington Post (id. ¶ 123(f)), and (b) because Keough has served as a non-executive chairman of Allen & Company LLC, an investment banking firm, since 1993, during which time Allen & Co. provided services to IAC in connection with IAC’s acquisition of Ticketmaster, Hotels.com, and Expedia (id ¶ 123(d)). The Complaint alleges that the fees that Allen & Co. earned in this capacity have not been disclosed.
As noted above, the fact that Diller and Keough have sat together on the boards of other companies does not compromise Keough’s independence.
Halpert Enters.,
D. Disinterestedness
Having rejected derivative plaintiffs’ claims that Diller controlled the seven Outside Directors, the inquiry now turns to the disinterestedness of the Outside Directors at the time this action was filed.
1. Plaintiffs’ Insider Trading Claims
Directors are considered interested for purposes of determining demand futility when they “appear on both sides of a transaction [or] expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.”
Aronson,
Here, Barton is the only Outside Director who traded IAC stock during the relevant period. 16 Plaintiffs argue that Barton is disabled from considering a demand because he sold “1.2 million shares of Company stock worth over $40.6 million” without disclosing “his intimate knowledge of the problems Expedia experienced, both before and after IAC’s acquisition.” (DC Opp’n 12 (citing DC ¶¶ 58, 67, 111).) Barton sold 20,000 shares each week from August 2003 to January 2004, and 28,150 shares every seven days from January 2004 to July 2004. (DC ¶¶ 60-61.)
“While unusual insider trading activity during the class period may permit and inference of bad faith and scienter,” plaintiffs have failed to establish that Barton’s stock sales were “unusual.”
Acito,
2. Plaintiffs’ Caremark Claims
Plaintiffs also seek demand excusal on the grounds that the Outside Directors faced a substantial likelihood of liability for their failure to institute sufficient internal controls to monitor the condition of IAC’s businesses and its accounting practices. (DC Opp’n 17.) A failure-of-oversight claim against a corporation’s directors “is possibly the most difficult thеory in corporation law upon which a plaintiff might hope to win a judgment.”
In re Caremark Int’l Derivative Litig.,
Here, plaintiffs’ attempt to plead a
Care-mark
claim fails because it is not supported by particularized factual pleading. First, plaintiffs attempt to argue that Keough, Schwarzkopf, and Spoon, as members of the audit committee, “knew that IAC was only paying state and local sales and occupancy taxes based upon the wholesale price IAC paid for hotel rooms, not the full amount paid by customers.” However, Keough, Schwarzkopf, Spoon, .and the other directors cannot be said to face “substantial liability” on the occupancy tax issue because the Court has already found the alleged nondisclosures immaterial. Moreover, plaintiffs’ allege accounting irregularities only in the most general terms and do not even allege that defendants violated GAAP.
See also Novak,
The Delaware courts rejected a similar claim in
Guttman,
• The actual effect of the restatements on NVIDIA’s bottom line;
• The reasons why particular defendants should have been on notice of the accounting irregularities that are alleged ....;
• The status of the company’s financial controls during the Contested Period, including whether the company had an audit committee during that period, how often and how long it met, who advised the committee, and whether the committee discussed and approved any of the allegedly improper accounting practices. Relatedly, the complaint is devoid of any pleading regarding the full board’s involvement in the preparation and approval of the company’s financial statements.
• The relationship of the defendant’s trades' — particularly those of the outside directors — to permitted trading-periods ....
Id.
at 498. Because the complaint contained no “well-pled factual allegations — as opposed to wholly conclusory statements— that the NVIDIA independent directors committed any culpable failure of oversight under the
Caremark
standard,” the plaintiffs’
Caremark
claim failed.
Id.
at 507. Plaintiffs here have likewise “failed to ‘plead with particularity what obvious danger signs were ignored or what additional measures the directors should have taken.”
Halpert Enters, v. Harrison,
No. 02 Civ. 9501(SHS),
CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss the Class Complaint [68] is granted and the Class Complaint is dis
Defendants’ motion to dismiss the Derivative Complaint [69] is also granted. The Clerk of the Court is directed to close the cases Butler v. Diller, 04 Civ. 9067, and Garber v. Diller, 05 Civ. 1145.
SO ORDERED.
Notes
. The Derivative Complaint extends the relevant period to cover “violations of law that occurred between March 2003 and the present” (DC ¶ 1), but all of the alleged wrongdoing described in the Derivative Complaint took place during the class period. (Id. ¶ 55.)
. The Court assumes that plaintiffs intended to state that Kaufman is a member of the board of directors and is also vice chairman of the Company (not the board), as IAC denotes him as such on their website, www.iac. com/management.html, and in their public filings, see, e.g., 2003 Form 10-K, at 153 (Mar. 15, 2004).
. The Derivative Complaint states that IAC repurchased "over 47 million shares” of its stock rather than 62 million, but this discrepancy is not relevant to the instant motions.
. Although plaintiffs quote a Company press release issued on August 3, 2004 and the anаlyst conference call following the earnings release, they fail to mention that IAC revised its earnings guidance on the call and in its SEC filing that day.
See
Form 8-K, at 6 (Aug. 3, 2004) ("IAC forecasts full year 2004 Operating Income Before Amortization of approximately $1 billion, the low end of our original range of $1.0 to $1.2 billion, and expects operating income of approximately $430 million.”); (Tr. of Q2 2004 Earnings Call, at 3 (Aug. 3, 2004) (DiPrima Aff. Ex. 15)). Under
Rothman v. Gregor,
. Defendants, citing Rothman, argue that the Court in deciding the motion to dismiss may consider various contracts between Hotwire and airline companies. Class plaintiffs argue that the Court may not consider these contracts because the contracts are not integral to the Class Complaint and are not incorporated by reference. The Court resolves this dispute infra at note 8.
. IAC's earnings projection was "revised” in the limited sense that IAC stated in the press release on August 3, 2004, that it expected 2004 earnings to come in at the low end of the projected range announced in November 2003 of $1.0 to $1.2 billion.
. In strenuously arguing that defendants admitted at the end of the class period that IAC lacked long-term contracts with airlines, plaintiffs implicitly acknowledge that simply stating that they expect discovery to confirm their belief regarding the terms of the airline contracts is not sufficiently particularized to satisfy the requirements of the PSLRA. Other courts have specifically so held.
See In re Theragenics Corp. Sec. Litig.,
. On January 6, 2006, defendants moved for leave to file the Hotwire contracts with the airlines under seal. Class plaintiffs opposed this motion, arguing that, because the Complaint does not rely on the contracts, considering them at the motion-to-dismiss stage is inappropriate. Because the Court finds that the Complaint does not allege particularized facts to support the allegation that the contracts were not long-term, the Court need not consider the actual terms of the Hotwire contracts to resolve this aspect of defendants' motion.
. Plaintiffs also argue that because this statement was incorporated by reference into the registration statements filed with the SEC for the Hotels.com, LendingTree, and Expedia mergers, those registration statements were rendered materially false and misleading as well. See infra at I.D.
. See supra Background at II.A.2.
. The Derivative Complaint describes Dil-ler’s relationship with defendants Khosrowsh-ahi, Bennett, and Malone (DC ¶ 123(f)), but none of these individuals was serving on the Board at the time plaintiffs filed their Complaint, and thus Diller’s relationships to them are not relevant to the issue of demand futility.
(See id.
¶ 114);
See Cal. Pub. Employees’ Ret. Sys. v. Coulter,
. The Court refers to these seven directors (Barton, Bronfman, Keough, Kravis, Rattner, Schwarzkopf, and Spoon) as "Outside Directors.” The Court uses this term merely for simplicity's sake and does not mean to imply by its use of this term that von Furstenberg is not also an outside director.
. The Complaint alleges that defendant Barton is interested because he sold stock during the class period, but does not allege that Dil-ler dominates or controls Barton's decisions. The Court therefore considers Barton's independence from Diller to be conceded by plaintiffs.
. Plaintiffs cite
In re New Valley Corp.,
No. Civ. A. 17649,
. Plaintiffs cite a New York Times article published August 10, 2003 as proof that Diller has admitted that Keough was not "independent.” (See DC ¶ 122(d).) The article stated, "Mr. Diller said that on Audit committee matters requiring a fully independent director as chairman, Alan Spoon, former chief operating officer of the Washington Post Company, would take over.” (Id.) However, in the context in which he was speaking, it is clear that Diller was referring to the SEC requirement that audit committee members be "independent.” The SEC definition of "independence,” unlike the definition of “independence” in the demand context, prohibits board members from accepting "directly or indirectly any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof.” 17 C.F.R. 240.10A-3(b).
. Plaintiffs also allege that Diller's and Kaufman's trades are disabling interests. Because the Court has already assumed that Diller and Kaufman are interested directors, these claims are not analyzed further here.
. Because derivative plaintiffs' claim pursuant to Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), is premised on the same allegations of wrongdoing, it is also dismissed for failure to plead demand futility with adequate particularity.
See Halpert Enters.,