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The Honorable Robert S Lasnik
I
FILEDooG ~-, ENTERED
ED ___RECEIVED
NOY 13 2001 KNLERK U S D S RICECDl1R7~► ~RfV 4f5TRfCT
OF WASHINC,70NDEPUTY
UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WASHINGTON
)IN RE NETWORK COMMERCE, INC )SECURITIES LITIGATION ) No COI-0675L
} CONSOLIDATED AMENDED} CLASS ACTION COMPLAINT
THIS DOCUMENT RELATES TO. )} JURY TRIAL DEMANDED
ALL ACTIONS )
i IfIIIII III i III IN III IfIIi I II III IIII 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 I NIllllf 1111111111 fill 111111 111111111 IN INCV 01-00675 4000000 .10
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 1 ORIGINA LN %c[aENrs125269111CoMPLAINT AMENDED 111301 Doc
LAW OFFICES OF
KELLER ROHRBACK L .L.P1201 THIRD AVENUE SUITE 3200
SEATTLE, WASHINGTON 88101 .3052TELEPHONE ( 206) 623 1900FACSIMILE (206) 623.33846
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• sTABLE OF CONTENTS
Page
NATURE OF ACTION . .. I
Violations of Exchange Act 1
Violations of Security Act . .5
Proxy Violations . . . . . . . . . . . . . . . . . . 6
JURISDICTION AND VENUE . . . . . . . . . . . . .. 7
PARTIES . . . . . . . . . . . . . . . . . . . 7
Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . .7
Network Commerce Defendants . . . . . . 8
IPO Underwriter Defendants . 10
SPO Underwriter Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11
CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
NO STATUTORY SAFE HARBOR .. 15
SUBSTANTIVE ALLEGATIONS COMMON TO NON-PROXY VIOLATIONS OF THEEXCHANGE ACT. 1 6
Defendant Walker 's Illegal Windfall . . . . . . . . . . . . . . . . . . . . . . . 16
The Company Reported Fraudulently Inflated Numbers . . 17
Statements Regarding Numbers of Merchants, Subscribers, And Visitors . . . . . 17
The Statements Regarding Numbers of Merchants, Subscribers,and Visitors Were Fraudulent. 2 1
The Company Reported Fraudulent Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Statements Regarding Company Revenue . . . . .. . . . . . . . . . . . . . . . . . . 23
The Statements Regarding Revenue Were Fraudulent . . . . . . . . . . . . . . . . . . . . . . . .25
Further Fraudulent Statements During Balance of Class Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Truth Begins To Emerge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
The Truth Is Revealed.
SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONS OF THE SECURITIE SACT .. 47
Materially False And Misleading Statements in Connection with the Initial Public Offering . .47
Materially False and Misleading Registration Statement in Connectionwith the Secondary Public Offering . . . . . . . . . . . . . . . . . . . 52
Materially False and Misleading Statements In Connection With The Ubarter Merger . . . . . 56
SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONS OF SECTION 14(A) O FTHE EXCHANGE ACT . . . . . . . . . . 61
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LAW OFFICES OF
KELLER ROHRBACK L L .P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 206) 623 19D0FACSIMILE ( 208) 623-3384
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Materially False and Misleading Statements in Connection with the April 19, 2000 ProxyStatement 6 1
ADDITIONAL SCIENTER ALLEGATIONS . . . . . . . . 63
WALKER'S UNDISCLOSED AND/OR UNLAWFUL PROFITS . . . . . . . . . . . 64
The Executive Compensation Plan 65
Continued Need for Financing . 66
FRAUD-ON-THE-MARKET ALLEGATIONS . . . . . . . . 67
COUNT I . . . . . . . . . . 68
COUNT II . 70
COUNT III . . . . . . . . . . 71
COUNT IV, . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
COUNT V . . . . . . . . . . . . . . 73
COUNT VI 74
COUNT VII . . . . . . . . . . . . . . . 76
COUNT VIII . . . . . . . . . . . . . . . . . . . . . . . . 78
COUNT IX . . . . . . . . . . . . . . . . . . 79
PRAYER FOR RELIEF 80
JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 1
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LAW OFFICES O F
KELLER RQHRBACK L .L .P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHONE (206) 623-1900FACSIMILE (208) 823-3384
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Plaintiffs, individually and on behalf of all other persons similarly situated, by thei r
undersigned attorneys, for their complaint, allege upon personal knowledge as to themselves and
their own acts, and upon information and belief as to all others matters, based upon the investigation
made by and through their attorneys, which investigation included, inter alia, interviews with
material witnesses and review of documents cited herein, including the promissory notes,
employment agreements, Network Commerce's filings with the Securities and Exchange
Commission ("SEC"), news reports, press releases, and other publicly available documents of
Network Commerce Inc . ("Network Commerce" or the "Company" )
NATURE OF ACTION
I Plaintiffs bring this action as a class action on behalf of themselves and all othe r
persons who purchased the securities of Network Commerce during the period September 28, 1999
through and includmg April 16, 2001 (the "Class Period"), to recover damages from violations of
Sections 10(b), 14(a) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15
U.S.C. § 78), 78n (a), and 78t, and Rules I Ob -5 and 14a-9, 17 C.F.R. §§ 240.1 Ob-5 and 240.14a-9,
promulgated thereunder ; and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the
"Securities Act"), 15 U S C §§ 77k, 771, and 77o
Violations of Exchange Act
2 During the Class Period, defendants Network Commerce and its CEO, defendan t
Dwayne M Walker, created and implemented a scheme designed to artificially inflate the price of
the Company's stock while at the same time concealing the true value of the Company's business .
The implementation of the scheme began with defendants Network Commerce and Walker making
materially false and misleading statements in connection with the Company's IPO, SPO, and Ubarter
Merger, as discussed herein Each registration statement and prospectus, as well as quarterly and
annual financial reports filed with the SEC during the Class Period, failed to disclose that the
Company had made substantial so-called loans to defendant Walker and failed to disclose that thes e
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LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 9$101-3052
TELEPHONE ( 206) 623-1900FACSIMILE (206) 623-3384
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undisclosed payments were secured only by the unvested stock options held by defendant Walker
The so-called loans were not simply a one-time event but became a method of doing business at
Network Commerce, with Walker taking frequent and undisclosed "draws" from the corporate
treasury that totaled millions of dollars during the relatively short Class Period. The actions of
defendants Network Commerce and Walker constituted a violation of Sections 10(b) and 20 of the
Exchange Act .
3 The so-called loans constituted a senior executive perquisite that was never revealed
to the investing public during the Class Period These so-called loans were designed to allow, and
had the effect of allowing, defendant Walker to guarantee himself a minimum sale price for his stock
options without giving up anything If the stock price went down and the options became worthless,
defendant Walker would keep the money from the Company in exchange for worthless stock
options This was in essence an undisclosed short sale On the other hand, if the share price
increased and the options had value, defendant Walker could repay the loans and keep all the profits
Thus, the Company not only granted defendant Walker stock options as part of his compensation but
arranged a scheme whereby defendant Walker could take all of the potential reward from the options
while the Company would keep all of the risk .
4. Through just the so-called loan component of Network Commerce ' s and Walker' s
scheme, defendant Walker took $4 5 million from the Company in the first 14 months after the IPO .
Defendant Walker never paid back a penny on these loans and thus the scheme left the Company
with a $4.5 million loss The fact that these transactions were not disclosed to shareholders and the
markets made the scheme even more egregious .
5 Network Commerce 's and Walkers 's materially false and misleading statements
during the Class Period served to enhance the personal wealth of defendant Walker at the expense o f
the Company's shareholders. When Network Commerce could no longer afford to make six- o r
seven-figure undisclosed payments to Walker or other executives as so-called loans, Walker resorte d
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LAW OFFICES OF
KELLER RQHRBACK L.L.P
1201 THIRD AVENUE SUITE 3200
SEATTLE, WASHINGTON 98101-3052TELEPHONE ( 206) 923-1900FACSIMILE ( 209) 623 3384
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to sales on the open market of his shares as soon as they were free of the restrictions imposed by the
IPO and SPO. While the Network Commerce Defendants' public statements served to bolster the
stock price, Walker sold hundreds of thousands of shares of Company stock at prices inflated by the
repeated materially false and misleading statements Through this fraudulent scheme, Walker
realized more than $2 4 million in proceeds from the sale of more than 900,000 shares of Network
Commerce stock This was in addition to the $4 5 million in proceeds realized by Walker through
"loans" from the Company .
6 In furtherance of this scheme to artificially inflate the price of the Company's stock ,
defendants Network Commerce and Walker knowingly or with deliberate recklessness distributed to
the investing public materially false and misleading financial statements and press releases
concerning the Company's financial condition and performance. From the Company's birth as a
public company in September 1999 through December 2000, defendants Walker and Network
Commerce convinced the market that its business was growing exponentially by releasing inflated
numbers of users of its products and services that bore no relation to the generation of revenue.
They also released information concerning the Company's growth of revenue, earnings, and ability
to achieve profitability that was inflated by the Company's premature recognition of revenue At the
same time, Walker and Network Commerce failed to disclose known facts that directly contradicted
their public statements, including that (i) Network Commerce's consumer website, ShopNow .com
("ShopNow"), touted by the Network Commerce Defendants as a leading shopping site, was to be
discontinued; (ii) most of the business acquisitions and investments made during the Class Period,
which cost the Company approximately $214 million, were already substantially impaired and
would result in write-offs of $142 2 million ; and (iii) the Company had violated several material debt
covenants under its bank credit agreement and was in default and subject to acceleration of all
amounts due
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LAW OFFICES OF
KELLER ROHRBACK L .L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 206) 823-1900FACSIMILE (206) 623-3384
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• •7. As a result of these materially false and misleading statements, the market prices of
the Company's securities were artificially inflated during the Class Perio d
8 By January 2001, with the Company's fiscal year 2000 annual financial statement s
being reviewed by its outside auditors and in the wake of the abrupt departure in December 2000 of
the Company's Chief Financial Officer, Alan Koslow, Walker and Network Commerce were no
longer able to hide the true condition of the Company. On January 23, 2001, they revealed in a press
release that (1) the Company planned to shut down ShopNow in the first quarter of 2001, previously
described by them in a May 18, 2000 press release as "a leading shopping network and directory,"
(ii) the Company would reduce its workforce by 145 employees, and (iii) take other cost-cutting
measures
9 Days later, in a January 29, 2001 press release, Walker and Network Commerce
belatedly revealed that (1) the Company would recognize an impairment charge of $124.5 million in
the fourth quarter of 2000 reflecting the value of its failed business acquisitions and investments in
other companies, including Ubarter ; (ii) the Company incurred $16 8 million in restructuring charges
mostly from the shut-down of low-margin businesses ; (iii) the Company was materially out of
compliance with working-capital covenants under its bank credit agreement ; and (iv) unless the
circumstances of the Company changed, its auditors would issue a "going concern" opinion in the
Company's annual report .
10 The revelations in January 2001 were stunning in that they directly contradicted
Walker's and Network Commerce's previous statements in press releases, some made as recently as
the month before. The news shocked the market and sent the Company's stock plunging from
$1 .325 per share to $0 75 per share on January 24, 2001, to close at $ .9375 per share, down nearly
30 percent from the previous day's close. The revelations on January 29, 2000 sent the Company's
stock down a further fifteen percent, from $0 .8125 per share on January 29, 2001 to close at $0 687 5
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LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE (208) 623-1900FACSIMILE (206 ) 823-3384
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1 •per share on January 31, 2001 The stock price represented a 97 percent drop from the Class Perio d
high of $23 4375 per share.
11 In the company's Annual Report for fiscal year 2000 filed on form 10-K with the
SEC (the "2000 Form 10-K"), filed nearly two months late, the Company revealed the truth about
the transactions between defendant Walker and the Company - namely, that the various promissory
notes had been consolidated from several notes totaling $4 5 million into a single $3 8 million note .
Furthermore, this single note would be fully repaid with 1 .4 million shares of Company stock at the
market value on the date of the transfer. On the date of the agreement, those shares were valued at
only $223,930 93 . The 2000 Form 10-K also revealed that the Company would lay off additional
employees, close another division, and faced the real possibility of bankruptcy
12. The market reacted with surprise to the news , sending the stock price of the Company
down from $0 156 to close at $0.125 on April 18, 2001, another decrease of nearly 20 percent .
13. After trading below one dollar per share for many months despite a one-for-fifteen
I reverse stock split on June 15 , 2001, the Company 's common stock was delisted from the NASDA Q
on or about August 29, 2001 for failing to meet the minimum bid price requirement of one dollar pe r
share
Violations of Security Act
14. During the Class Period, defendants Network Commerce, the IPO and SPO
Defendants, and Walker disseminated to the investing public materially false and misleading
registration statements and prospectuses related to Network Commerce's Initial Public Offering on
or about September 29, 1999 ("IPO"), Secondary Public Offering on or about February 16, 2000
("SPO"), and acquisition of Ubarter .com on June 1, 2000 (the "Ubarter Merger"). Each registration
statement and prospectus failed to disclose the issuance of so-called loans to defendant Walker and
other senior executives beginning in September 1999, that these undisclosed payments were secured
only by the unvested stock options held by defendant Walker, and that Walker intended to and di d
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LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE, WASHINGTON 98101-3052
TELEPHONE (206) 623 1900FACSIMILE (208) 623 3384
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continue to make these periodic "draws" from the corporate treasury The material omissions
rendered numerous statements in each registration statement and prospectus materially false and
misleading, including statements relating to use of proceeds, executive compensation, employment
contracts, related-party transactions, and the representation that defendant Walker was restricted
from selling his holdings of Network Commerce stock These materially false and misleading
statements constituted a violation of Sections 11, 12(a)(2), and 15 of the Securities Act.
15. These transactions were material to plaintiffs because (x) they reflected that the
Company and its management were focusing their attention primarily on the welfare of defendant
Walker and not that of the Company or its stockholders ; (il) they reflected a propensity of the
Company and its management to engage in non-arms'-length transactions with related parties on
terms unfavorable to the Company; (iii) they reflected a propensity of the Company and its
management to not disclose relevant information in a fair and timely manner, and (iv) they
demonstrated a lack of confidence of the CEO in the value of his stock options and contingent
compensation and thereby lack of confidence in the long-term prospects of the Company itself .
16 In addition, in violation of Sections 11, 12(a)(2), and 15 of the Securities Act, the
Registration Statement/Proxy/Prospectus filed in connection with the Ubarter Merger failed to
disclose that Ubarter was acquired based on inaccurate financial projections and that Ubarter
required significant capital investments to operate effectively .
Proxy Violations
17 During the Class Period, defendants Network Commerce and Walker als o
disseminated to the investing public and its shareholders a materially false and misleading proxy
statement The proxy statement filed during the Class Period failed to disclose the issuance of so-
called loans to defendant Walker and failed to disclose the fact that these undisclosed payments were
secured only by the unvested stock options held by defendant Walker. These material omissions
also rendered numerous statements in the proxy statement materially false and misleading, includin g
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LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 208)623-1900FACSIMILE ( 206) 623-3384
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1 statements relating to employment contracts and related -party transactions These materially false
2 and misleading statements constituted a violation of the Section 14(a) of the Exchange Act These
3 omissions were material for reasons analogous to those given in paragraph 15, abov e
4 s
5 18 The Company ' s common stock currently trades on the OTC bulletin board On
6 November 9, 2001, its shares closed at $0 1 2
7 JURISDICTION AND VENUE
9 19 Plaintiffs bring this action pursuant to Sections 10(b), 14 (a) and 20 of the Exchange
9 Act and Rules 10b-5, 17 C F R § 240 10b-5, and 14a-9, 17 C F R § 240 14a-9 that the SEC
10 promulgated thereunder , and Sections 11, 12(a)(2), and 15 of the Securities Act
11 20 This Court has jurisdiction in this action pursuant to Section 27 of the Exchange Act,
12 15 U S C § 78aa, Section 22(a) of the Securities Act, 15 U S C § 77v (a), and 28 U S C § 133 1
13 21 Venue is proper in this District pursuant to Section 27 of the Exchange Act, Section
14 22 of the Securities Act, and 28 U S C §§ 1391(b) and (c) The Company 's corporate headquarters
15 are located in this district Thus, many of the acts giving rise to the violations complained of herein,
16 including the dissemination of mate rially false and misleading information, emanated from, occurred
17 in, and had substantial effects in this distric t
18 22 In connection with the acts, transactions and conduct alleged herein, defendants used
19 the means and instrumentalities of interstate commerce, including the United States malls , interstate
20 telephone communications , and the facilities of national securities exchanges and market s
21 PARTIES
22 Plaintiffs
23 23 Plaintiff Jan Sherman, a resident of Califo rn ia, acquired shares of the Company's
24 common stock during the Class Period on the open market and was injured thereb y
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•24. Plaintiff James Michaelson, a resident of Illinois , acquired shares of the Company' s
common stock in connection with the Company's IPO on or about September 28, 1999 and als o
during the Class Period on the open market and was injured thereb y
25 . Plaintiff Jason Elkin, a resident of Georgia, acquired shares of the Company' s
common stock in connection with the Company's SPO on or about February 16, 2000 and als o
during the Class Period on the open market and was injured thereby.
26. Plaintiffs William Jo and Paul Lum, both residents of British Columbia, acquired
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shares of the Company' s common stock in connection with the acquisition of Inte rnet Domain
Registrars Corporation by Network Commerce on or about December 22, 2000 and were injured
thereby
27. Plaintiff William Wiegand, a resident of Connecticut, acquired shares of the
Company's common stock during the Class Period on the open market and was rjured thereby .
28 Plaintiff Steve Levy, a resident of Illinois, acquired shares of the Company's commo n
stock during the Class Period on the open market and was injured thereby .
29 The foregoing plaintiffs were appointed Lead Plaintiffs by order of this Court . Lead
Plaintiffs acquired Network Commerce common stock during the Class Period, as set forth in their
certifications accompanying the Declaration of Scott A Kamber in Support of the Motion of the
Network Commerce Shareholder Group for Appointment of Lead Plaintiff and Approval of
Proposed Lead Plaintiffs' Selection of Lead Counsel, filed on July 13, 2001, and have suffered
substantial damages as a result of the wrongful acts of defendants a alleged herei n
Network Commerce Defendant s
30 Defendant Network Commerce is a Washington corporation with its principal
executive offices at 411 First Avenue South, Suite 200 North, Seattle, Washington During the Class
Period, the Company described itself as a global technology infrastructure and services company,
providing services such as domain registration, Internet hosting, commerce, business, marketing ,
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LAW OFFICES OF
KELLER ROHRBACK L .L.P.
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 96101-3052
TELEPHONE (206) 15 23-1900FACSIMILE 4206) 623 3364
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wireless technology , and Internet marketplaces . The Company maintains a website at
I www.networkeommerce.com where it disseminates investor information including annual and
quarterly reports filed with the SEC and earnings releases. During the Class Period, Network
Commerce's common stock traded on the NASDAQ before being delisted on or about August 28 ,
2001 . As of April 6, 2001, there were 78,253,578 shares of the Company's common stock issued
and outstanding
31 Defendant Dwayne M Walker ("Walker") has been Chairman of the Board of the
Company since March 1996, Chief Executive Officer of the Company since August 1996, and a
director since August 1995. Walker was also President of the Company from March 1996 t o
January 2000 . As of December 31, 1999, Walker beneficially owned 2,660,465 shares or 6 09
percent of Network Commerce's outstanding shares During the Class period, Walker sold over
900,000 shares of his total holdings at artificially inflated prices As of December 31, 2001, Walker
beneficially owned 201,003 shares of or 3 .0 percent of Network Commerce's outstanding shares .
Because of Walker's position with the Company, he had access to adverse non-public informatio n
about its business, finances, products, markets, and present and future business prospects . Walker
acted to conceal and misrepresent such material information, while selling his own Company stock,
in violation of his duties and responsibilities under federal securities laws
32. Defendants Network Commerce and Walker are sometimes referred to herein as th e
f "Network Commerce Defendants "
33 Walker signed each registration statement, prospectus for the IPO, SPO and Ubarte r
Merger , proxy statement, annual report on Form 10-K, and quarterly report on Form 10-Q of the
Company during the Class Period and was quoted frequently in press releases issued during the
Class Period . Defendant Walker, because of his position of control and authority, was able to an d
did control the content of the various SEC filings, press releases, and other public statement s
pertaining to the Company during the Class Period .
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 9
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LAW OFFICES OF
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SEATTLE WASHINGTON 98101-3052TELEPHONE (206) 623 1800FACSIMSLE (206) 623-3384
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1 34 Walker had a duty, because of the positions he held, to disseminate complete,
2 accurate, and truthful information regarding the Company's business and operations . He
3 participated in the drafting, preparation, and/or approval of the various public reports and other
4 communications of the Company complained of herein . Accordingly, Walker is responsible for the
5 accuracy of the public reports and releases detailed herein and is liable for the representations
6 contained herein
7 35. Because of his position, ability to exercise power and influence with respect to the
8 Company's course of conduct, and access to material inside information about the Company, Walker
9 was, at the time of the wrongs alleged herein, a controlling person of the Company within the
10 meaning of Section 20(a) of the Exchange Act and Section 15 of the Securities Act
11 IPO Underwriter Defendants
12 36. Defendant U S. Bancorp Piper Jaffray ("Piper Jaffray") is a brokerage and investment
13 banking firm with its principal offices located at U .S. Bancorp Center, 800 Nicollet Mall, Suite 800,
14 Minneapolis, MN 55402 Piper Jaffray was a lead and/or managing underwriter, and substantially
15 participated in the wrongs alleged herein, of the Network Commerce Initial Public Offering on or
16 about September 29, 1999 Piper Jaffray was also a co-manager for the Secondary Public Offering
17 on or about February 16, 2000. Piper Jaffray received substantial fees in connection with the IPO
18 and SPO.
19 37. Defendant Dain Rauscher Inc . ("Dain Rauscher") is a brokerage and investment
20 banking firm with its principal offices located at 60 South Sixth Street, Minneapolis, Minnesota
21 55402. Dain Rauscher was a lead and/or managing underwriter, and substantially participated in the
22 wrongs alleged herein, of the Network Commerce Initial Public Offering on or about September 29,
23 1999. Dain Rauscher received substantial fees in connection with the IPO .
24 38 Defendant SoundView Technology Group, Inc ("SoundView"), successor in interest
25 to both SoundView Technology Group and Wit Capital Corp, is an investment banking firm with its
26
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principal offices located at 826 Broadway, New York, NY 10003 SoundView was a co-managing
underwriter, and substantially participated in the wrongs alleged herein, of the Network Commerce
Initial Public Offering on or about September 29, 1999 . SoundView received substantial fees in
connection with the IPO
39. Defendants Piper Jaffray, Darn Rauscher, and SoundView are collectively referred to
herem as the "IPO Underwriter Defendants ."
40. Defendants Walker, Network Commerce, and the IPO Underwriter Defendants are
sometimes referred to herein as the "IPO Defendants "
SPO Underwriter Defendants
41 . Defendant J P. Morgan Chase & Co ("JP Morgan"), formerly J.P Morgan & Co, is a
brokerage and investment banking firm with its principal offices located at 270 Park Avenue, New
York, New York 10017 JP Morgan was a lead managing underwriter, and substantially participated
in the wrongs alleged herein, of the Network Commerce Secondary Public Offering on or about
February 16, 2000 JP Morgan received substantial fees in connection with the SP O
42 Defendant CIBC World Markets ("CIBC") is a brokerage and investment banking
firm with its principal offices located at 270 Park Avenue, New York, New York 10017 . CIBC was
a co-managing underwriter, and substantially participated in the wrongs alleged herein, of the
Network Commerce Secondary Public Offering on or about February 16, 2000 . CIBC received
substantial fees in connection with the SPO .
43. Defendant UBS PaineWebber ("PaineWebber"), successor in interest to
PaineWebber, Inc ., is a brokerage and investment banking firm with its principal offices located at
1285 Avenue of the Americas, New York, New York 10019 PaineWebber was a co-managing
underwriter, and substantially participated in the wrongs alleged herein, of the Network Commerce
Secondary Public Offering on or about February 16, 2000 . PaineWebber received substantial fees in
connection with the SPO
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44. Defendants Piper Jaffray, JP Morgan, CIBC, and PaineWebber are collectivel y
referred to herein as the "SPO Underwriter Defendants ."
45 Defendants Walker, Network Commerce, and the SPO Underwriter Defendants ar e
sometimes referred to herein as the "SFO Defendants "
46. The IPO Underwriter Defendants and SPO Underwriter Defendants each owed to the
I purchasers of the Company's stock, including plaintiffs, the duty to make a reasonable and diligent
investigation of the statements contained in the IPO and SPO registration statements and
prospectuses . This duty included ensuring that the statements contained therein were true, and that
there were no omissions of material fact the inclusion of which was required in order to make th e
statements contained therein not misleading . As alleged herein, each Defendant violated those
specific duties and obligations and knowingly, or with reckless disregard, issued and caused to be
issued materially false and misleading statements concerning the Company's initial public offering
and secondary public offering
47. The IPO Underwriter Defendants and SPO Underwriter Defendants each had a dut y
promptly to disseminate accurate and truthful information with respect to Network Commerce's
initial public offering and secondary public offering or to cause and direct that such information be
disseminated and promptly to correct any previously disseminated information that was incorrect or
materially misleading . Defendants' failure to do so caused the price of Network Commerce
common stock to be artificially inflated .
CLASS ACTION ALLEGATION S
48. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedures 23(a) and (b)(3) on behalf of a class consisting of all persons and entities who purchased
or otherwise acquired the Company's common stock between September 28, 1999 and April 16,
2001, inclusive (the "Class") . Excluded from the Class are defendants, members of the immediat e
family of defendant Walker, any entity in which any defendant has or had a controll ing interest, and
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t •the officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors and
assigns of any defendant
49. This action is properly maintainable as a class action because :
(a) during the Class Period there were more than 59 million shares of Network
Commerce stock outstanding . The members of the Class for whose benefit this action is brought are
dispersed throughout the United States and are so numerous that joinder of all class members is
impracticable . Thousands of Network Commerce shares were traded publicly during the Class
Period . Plaintiffs believe that there are hundreds, if not thousands, of Class members ;
(b) plaintiffs' claims are typical of the claims of the members of the Class and
plaintiffs and all members of the Class sustained damages as a result of defendants' wrongful
conduct complained of herein ,
(c) plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class action litigation Plaintiffs have
no interests antagonistic to, or in conflict with, the Class that plaintiffs seek to represent,
(d) a class action is superior to other available methods for the fair and efficient
adjudication of the claims asserted herein because, inter alga, joinder of all members is
impracticable . Furthermore, because the damages suffered by individual members of the Class may
be relatively small, the expense and burden of individual litigation make it virtually impossible for
many Class members to redress the wrongs done to them The likelihood of individual class
members prosecuting separate claims is remote;
(e) plaintiffs anticipate no unusual difficulties in the management of this action as
a class action; and
(f) the questions of law and fact common to the members of the Class
predominate over any questions affecting individual members of the Clas s
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• •50 Common questions of law and fact exist as to all members of the class and
predominate over any questions affecting solely individual members of the Class Among the
questions of law and fact common to the Class with respect to violations of Sections 10(b) and 20 of
the Exchange Act are the following-
(a) whether the federal securities laws were violated by the defendants' act s
and/or omissions as alleged herein ,
(b) whether the Company's public reports and filings issued during the Class
Period misrepresented and/or omitted material facts about Network Commerce's financial condition,
including, but not limited to, the integration of acquisitions, revenue, growth and compliance with
debt covenants ;
(c) whether the Company issued materially false and misleading registration
statements ;
(d) whether the Company issued materially false and misleading prospectuses ,
I and
(e) whether defendants acted with knowledge or with reckless disregard for the
I truth in misrepresenting and/or omitting material facts ;
(f) whether, during the Class Period, the market price of Network Commerce
common stock was inflated artificially as a result of the defendants' wrongful conduct ;
(g) whether defendants participated in and pursued the common course of conduct
complained of herein; and
(h) what the proper measure is of Class members ' damages.
51 Common questions of law and fact exist as to all members of the class and
predominate over any questions affecting solely individual members of the Class . Among the
questions of law and fact common to the Class with respect to violations of Sections 11, 12(a)(2),
and 15 of the Securities Act are the following .
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(a) whether the federal securities laws were violated by defendants' acts and/or
omissions as alleged herein ;
(b) whether the Company issued materially false and misleading registration
II statements,
(c) whether the Company issued materially false and misleading prospectuses;
and
(d) what the proper measure is of Class members ' damages
52 Common questions of law and fact exist as to all members of the class and
predominate over any questions affecting solely individual members of the Class . Among the
questions of law and fact common to the Class with respect to violations of Section 14(a) of the
Exchange Act are the following
(a) whether the federal securities laws were violated by defendants' acts and/or
omissions as alleged herein;
(b) whether the Network Commerce Defendants caused the Company to issue a
materially false and misleading proxy statement ,
(c) whether the Network Commerce Defendants acted negligently in issuing false
and misleading statements contained in the Proxy Statement ,
(d) what the proper measure is of Class members' damages .
NO STATUTORY SAFE HARBOR
53 . The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint . The
statements alleged to be materially false and misleading herein all relate to then-existing facts an d
conditions . In addition, to the extent certain of the statements alleged to be false may be I
characterized as forward looking, they were not identified as "forward-looking statements" when
made, there was no statement made with respect to any of those representations forming the basis of
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this Complaint that actual results "could differ materially from those projected," and there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements . Alternatively, to the
extent that the statutory safe harbor is intended to apply to any forward-looking statements pleaded
herein, defendants are liable for those false forward-looking statements because at the time each of
those forward-looking statements was made, the particular speaker had actual knowledge that the
particular forward-looking statement was materially false or misleading, and/or the forward-looking
statement was authorized and/or approved by an executive officer of Network Commerce who knew
that those statements were false when made .
SUBSTANTIVE ALLEGATIONS COMMON TONON-PROXY VIOLATIONS OF THE EXCHANGE ACT
Defendant Walker's Illegal Windfall
54 During the Class Period, the Network Commerce Defendants fraudulently convince d
the market that ShopNow was successful, when it was not, in three ways (i) by causing the
Company to report fraudulently inflated numbers of merchants, subscribers, and visitors to
ShopNow, (li) by causing the Company to reported misleadingly inflated revenue, and (iii) by
causing the Company misleadingly to show apparent revenue growth by rapidly acquiring
companies that it had no intention of integrating or continuing to operate . The Company was
thereby able to continue to pay large and undisclosed sums to Walker in the form of so-called loans
and maintain artificially inflated stock prices so that Walker could reap millions of dollars in related-
party transactions and insider profits at the expense of the investing publi c
55 As further described in the remainder of this complaint, Walker reaped approximately
$4 5 million in "loans" that the Company forgave and another approximately $2 .4 million from
insider sales based on artificially inflated prices A chart list ing each transaction can be found at
paragraph 230, belo w
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The Compan -
Statements Regarding Numbers of Merchants , Subscribers, And Visitors
56. Network Commerce first began as TechWave in 1994, claiming to offer customers
and merchants on-line a "full suite of e-commerce solutions " In response to the market's rich
valuations of business-to-consumer (B2C") dot .com companies, on April 27, 1999 the Company
announced in a press release that TechWave had changed its name to ShopNow based on the
purported popularity of its shopping portal, "a collection of over 1 million pre-stocked storefronts
that pay store owners a percentage of all sales ."
57. The Company failed to disclose that the merchant , subscriber, and visitor numbers
they reported with respect to ShopNow's website were misleadingly inflated, or their significance
was exaggerated, through several practices in which the Company engaged A number of the
Network Commerce Defendants' statements in this regard are quoted immediately below, beginning
at paragraph 58 . The reasons that these statements were fraudulent is described thereafter, beginning
at paragraph 7 4
58 In a November 11, 1999 press release, the Company caused ShopNow to announc e
the acquisition of SpeedyClick Corp {"SpeedyClhck") for approximately $47 million in ShopNo w
stock and $3 million in cash . The press release further stated :
SpeedyClick members gain access to ShopNow.com's 40,000 merchants, 28shopping categories, millions of products and services and business-to-business e-Commerce services. The community elements of SpeedyClick arealso being integrated throughout the ShopNow Network . During October1999, the SpeedyClick Web site had well over 3 million visitors, with 7 3%reach of women on the Internet according to PC Data Online, and has justreached the 1 million registered users mark. Upon completion of theacquisition, the ShopNow Network will currently have over 6 million visitorsper month making it potentially one of the top five Internet destinationsamong women shoppers .
59 In the same press release, defendant Walker commented on the acquisition as follows :
We believe that the combination of our 40,000 plus merchants andSpeedyClhck's loyal community of women will immediately boost the succes s
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it of the ShopNow Network Linking community with e-Commerce is a natura l
integration and will immediately increase the transactions on the ShopNow2 Network
3 60. On November 17, 1999, the Network Commerce Defendants caused ShopNow to
4 announce the following in a press release-
5 ShopNow coin Inc (Nasdaq: SPNW), a leader in business-to-business and6 business-to-consumer e-Commerce services, today announced that
ShopNow.com will attract over 5 million visits during the month of7 November, far exceeding the more than 3 million visits in October . The new
5 million online monthly shopper figure does not include visits from8 SpeedyClick.com, a recent ShopNow.com acquisition
9 The ShopNow.com merchant base has also increased to over 40,000 onlinebusinesses and merchants up from approximately 30,000 merchants in
10 October. The more than 30% growth in online businesses, merchants and11 advertisers on the ShopNow Network continues ShopNow.com's growth as a
leading shopping destination
12"We are clearly seeing explosive growth on the ShopNow Network from
13 businesses, merchants and advertisers who recognize the value of connectingwith our millions of shoppers," said Dwayne Walker, Chairman and CEO of
14 ShopNow coin.
15 61 One week later, on November 22, 1999, the Network Commerce Defendants caused
16 ShopNow to announce the following in a press release .
17 Sho p Now.com Inc. (N asdaq: SPNW), a leader in business-to-business and18 business-to-consumer e-commerce services, today announced the ShopNow
Network was the third fastest growing site on the Internet for the week endin g19 November 14 according to Media Metrix, which tracks Internet audience
traffic and advertising Additionally, PC Data recognized ShopNow coin as20 the 10th most popular shopping site on the Web .
21 According to Media Metrix, ShopNow coin was up 125.9 percent to 137 daily22 unique visitors. Unique visitors are defined as new visitors to a Web site,
regardless of how many times that person returns . ShopNow.com ranke d23 ahead of leading retailers Buy.com and EToys.com, who placed fourth and
fifth respectively24
The ShopNow Network offers visitors 2825 shopping categories, over 40,000 merchants, millions of products and26 services, and a host of business-to-business e-commerce service s
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• •62 The following week, on November 30, 1999, the Network Commerce Defendants
caused ShopNow to announce the following in a press release :
ShopNow.com Inc (Nasdaq: SPNW), a leading business-to-business andbusiness-to-consumer e-commerce company, today announced it had over sixmillion visitors to the ShopNow Network for the month of November . Thisfigure far exceeds the revised projected number of five million shoppers forthe month The ShopNow Network . offers visitors 28 shopping categories,over 40,000 merchants, millions of products and services, and a host ofbusiness-to-business e-Commerce solutions
63 Approximately two weeks later, on December 15, 1999, defendants caused ShopNo w
to announce the following in a press release :
ShopNow.com Inc. (Nasdaq SPNW), a leading business-to-busmess andbusiness-to-consumer e-commerce enabling company, today announced thatover 6000 new businesses and merchants have joined the ShopNow Networkin the past 90 days, including Sears, PetsMart coin, Tavolo coin andBluefly coin. These merchant additions follow a string of growthannouncements from ShopNow-com as online businesses rush for premiervisibility and exposure during the holiday season and new yearShopNow.com now derives over 80% of its revenues from businesses andmerchants
64 In the same press release, defendant Walker commented on the announcement ,
stating, "ShopNow continues to experience strong interest from businesses and merchants who want
to increase their online sales."
65 . Defendants wasted no time in the New Year in its efforts to fool the market with it s
inflated numbers On January 4, 2000, the Network Commerce Defendants caused ShopNow to
announce the following in a press release:
ShopNow coin Inc. (NASDAQ SPNW), a leading e-commerce enablingcompany for business-to-business and business-to-consumer e-commerce,today announced over 1,100 affiliate and syndication partners have joined theShopNow Syndication Program in the last 30 days . These additions,combined with the more than thousand partners ShopNow coin securedthrough the recent acquisition of bottomdollar .com, reflects the rapid growthof ShopNow corn's e-commerce enabling infrastructure .
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66 In the same press release , defendant Walker commented on the announcement ,
stating , "This rapid growth in the ShopNow Network is an endorsement of our reach in providing e-
commerce services and infrastructure to businesses and Web sites throughout the Internet . "
67 On January 18, 2000, the Network Commerce Defendants caused ShopNow to
announce in a press release the launch of b2bNow com, which the Network Commerce Defendant s
described as a "global business-to-business portal . "
68 On January 20, 2000, the Network Commerce Defendants caused ShopNow to
announce in a press release financial results for the quarter and fiscal year ended December 31 ,
1999 The press release stated with regard to visitors to and merchants of ShopNow
In the fourth quarter of 1999, the ShopNow Network had over 21 millionvisits, up from 7 million visits in the third quarter of 1999 The ShopNowNetwork's page views more than doubled in the fourth quarter to 48 million,compared to 18 million in the third quarter of 1999 By the end of 1999, theShopNow Network had more than 47,000 merchants and over 2,500syndicated/affiliate sites that were connected to the ShopNow NetworkAdditionally, according to PC Data rankings, the ShopNow Network wasranked the 36th most popular property on the Internet for the fourth quarter of1999, compared to the 186th most popular property for the prior quarter
69. On February 29, 2000, the Network Commerce Defendants caused ShopNow to
announce the following in a press release .
ShopNow.com Inc (NASDAQ : SPNW), a leading e-commerce enablingcompany, today announced the ShopNow Network saw strong growth in thefirst two months of the first quarter, exceeding 20 million visitors during themonth of January alone . Visitor totals to the ShopNow Network have alreadysurpassed numbers for the entire fourth quarter of 1999, and the companyexpects to exceed its first quarter target of 25 million visitors by early MarchThe ShopNow Network is an extensive network of commerce-enabledInternet sites which brings together buyers and sellers worldwide .
The ShopNow Network offers visitors over 28 shopping categories, over500,000 businesses, over 48,000 merchants and millions of buyers
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1 •70. In the same press release, defendant Walker commented on the announcement as
follows.
The ShopNow Network is emerging as a preferred online commerce networkfor growing numbers of merchants, businesses and consumers . Weanticipate this growth to continue as buyers and sellers experience the benefitsof the ShopNow Network .
71 On March 15, 2000, the Network Commerce Defendants caused ShopNow to
announce the following in a press release :
ShopNow.com Inc (NASDAQ. SPNW), a leading e-commerce enablingcompany, today announced that the b2bnow corn Network the company'sglobal business-to-business portal , added 40,000 new business customerssince the site launched on January 18, 2000 .
72 In the same press release, defendant Walker commented on the announcement ,
stating , "In less than two months over 40,000 new businesses have joined the b2bnow com Network,
validating the need for an easy and efficient avenue for companies to conduct business with eac h
other on the Internet."
73 . In an April 25, 2000 press release announcing ShopNow 's financial results for the
quarter ending March 31, 2000, the Network Commerce Defendants caused ShopNow to state the
following with regard to the number of visitors to and customers of ShopNow
In the first quarter of 2000, visits to ShopNow.com's networks increased158% to over 55 4 million, from 21 .5 million visits in the fourth quarter of1999. This includes over 950,000 visits to b2bNow.com, the primarycomponent of the Business Commerce Network, launched in January Theaverage number of leads and orders per day over the ShopNow Networkincreased to 135,000 per day, from an average of 124,000 per day in thefourth quarter of 1999.
The Statements Regarding Numbers ofMerchants, Subscribers, and Visitors Were Fraudulen t
74 Throughout the Class Period, the Company heralded its success to the public through
its merchant, subscriber, and visitor numbers. Defendants knowingly or with reckless disregard
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reported these metrics in amounts calculated to mislead the public and indicate that ShopNow wa s
more successful than it really was in order to mislead the investing publi c
75. Throughout the Class Period, the Network Commerce Defendants used the inflate d
I numbers of merchants, subscribers, and visitors to the ShopNow website as an indicator of th e
Company's revenue growth Defendants failed to disclose that the vast majority of merchants of the
Company used only the free products and services offered by ShopNow and did not engage in an y
revenue generating transactions at al l
76 For example, the Network Commerce Defendants used the acquisition o f
SpeedyClick to generate large numbers of "hit" counts of ShopNow visitors, which the Company
misleadingly used to portray its growth and success but in actuality had little to do with growth or
success SpeedyClick was a gaming site Visitors played games and were awarded "Speedybucks"
redeemable on the SpeedyClick website ShopNow acquired SpeedyClick to drive Internet traffic to
the ShopNow website.
77. One manner in which traffic was driven to ShopNow was for the Company to place
"clues" to SpeedyClick games on ShopNow merchant sites . SpeedyClick visitors clicked onto the
merchant' s site in search of the clues The SpeedyClick visitors , however, would not make a
purchase from the merchant and instead were only looking for game clues As a result of thi s
practice, the Network Commerce Defendants knowingly or with reckless disregard reported high
amounts of traffic to ShopNow that had no relationship to the Company' s generation of revenue, its
success, or its popularity with consumers or businesses .
78. The number of ShopNow merchants reported by the Network Commerce Defendants
was inflated as well. Defendants routinely included "dead" and/or inactive merchants and double-
counted merchants to inflate its numbers .
79. As a result, ShopNow press releases reporting quarterly financial results during th e
Class Period were materially false and misleading because the Network Commerce Defendants
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knowingly or with reckless disregard failed to disclose that the reported numbers of merchants,
subscribers, and visitors of ShopNow had no correlation to the current or future generation of
revenue at ShopNow.
Statements Regarding Company Revenue
80 During the Class Period, the Network Commerce Defendants inflated the Company's
revenue by (i) prematurely recognizing revenue to meet quarterly revenue targets and consensus
analyst earnings estimates, and (ii) recognizing as current revenue the commitments by partners and
alliances to purchase advertising in the future
81 . According to the Annual Report for fiscal year 1999 filed with the SEC on Form 10-
K on or about February 10, 2000 (the "1999 Form 10-K"), ShopNow derived its revenue primarily in
two ways, stated as follows
We currently derive substantially all of our revenues from merchant servicesand the ShopNow marketplace .
Revenues from merchant services are generated principally throughdevelopment fees, hosting fees and sales and marketing services . Ourmerchant services can be purchased as a complete end-to-end suite of servicesor separately, allowing businesses and merchants to select only those servicesthey desire .
Revenues from the ShopNow marketplace, exclusive of BuySoftware com,are generated primarily from advertising and merchandising fees paid bymerchants, leads and orders delivered to merchants, as well as transactionprocessing and licensing fee s
82 On October 14, 1999, the Network Commerce Defendants caused ShopNow to
announce in a press release the financial results for the quarter ended September 30, 1999 The pres s
release stated, in relevant part ,
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ShopNow.com (Nasdaq SPNW), an electronic commerce company, todayannounced strong third quarter perform ance with revenues for the quarterended September 30, 1999 of $7 .6 million , an increase of 90% compared topro forma revenues of $4 0 million for the quarter ended June 30, 199 9
83 In the same press release, defendant Walker commented on the results, statin g
"We are very pleased with the financial results we reported for our firstquarter as a public company," said Dwayne Walker, president and chiefexecutive officer of ShopNow corn "Total revenues were $7 6 million andour gross margins were 36% for the third quarter of 1999 . ShopNow corn'srecord pro forma revenues during the third quarter of 1999 reflect the strongacceptance of the ShopNow Network as one of the leading c-commercenetworks on the Internet . Our financial results exceeded our internalexpectations "
84 In a December 6, 1999 press release, the Network Commerce Defendants cause d
ShopNow to announce the following.
ShopNow coin Inc (Nasdaq . SPNW), a leading business-to-business andbusiness -to-consumer e-commerce company , today announced that it expectsto exceed analyst revenue expectations for the fourth quarter endingDecember 31, 1999 .
ShopNow coin expects revenues to exceed analyst's projections of $10 5million dollars during the fourth quarter which represents an approximate 40%increase over the third quarter revenues In addition, ShopNow corn expectsto generate in excess of 80% of its revenues from businesses and merchantsduring the fourth quarter
In the month of November 1999 alone, ShopNow.com generated over 1 .5million orders and leads to merchants and businesses on the ShopNowNetwork ShopNow corn generated over 60,000 orders and leads per day onaverage in November In addition, ShopNow.com is currently averaging over6 million shoppers per month on its ShopNow Network .
ShopNow.com is also experiencing very strong growth in the number of newmerchants and businesses joining and using the ShopNow Network InNovember, over 2,000 new businesses and merchants joined the ShopNowNetwork and/or began using the ShopNow Network eBuslness services . Thenumber of businesses and merchants on the ShopNow Network has nowpassed 40,000 .
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LAW OFFICES OF
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• •85. On January 20, 2000, the Network Commerce Defendants caused ShopNow to
announce in a press release the followin g
ShopNow.com Inc., a leading e-commerce enabling company, todayannounced financial results for the quarter and twelve months endedDecember 31, 1999 .
Revenues for the quarter ended December 31, 1999 were $13 4 million, anincrease of 78%, compared to revenues of $7 6 million for the quarter endedSeptember 30, 1999. Gross profit in the fourth quarter of 1999 increased to42%, compared to 36% in the third quarter of 199 9
86 On April 25, 2000, the Network Commerce Defendants caused ShopNow t o
announce the following in a press release-
Total revenue for the first quarter was $18 .7 million, an increase of 39% fromprevious record revenue of $13 .4 million in the fourth quarter of 1999ShopNow.com currently derives revenue from its two core businesses .
ShopNow Network - Revenue from the ShopNow Network, whichconsists of the ShopNow corn marketplace, the BottomDollarNetwork, and various syndicate and affiliate sites, is principallycomprised of fees for advertising and merchandising programs Forthe quarter, revenue from the ShopNow Network increased 39% to$10.6 million from $7.6 million in the fourth quarter of 1999 .
Business Commerce Network and Services -- Revenue from the BusinessCommerce Network consists of revenue from b2bNow .com, includingmerchandising and licensing, and from transaction processing fees forpayments and fraud detection Additional revenue is derived from servicessuch as marketing and e-commerce store design, development, hosting andmaintenance. For the quarter, revenue from the Business Commerce Networkand Services increased 40% to $8 1 million from $5 8 million in the fourthquarter of 1999
The Statements Regarding Revenue Were Fraudulen t
87. During the Class Period, the Network Commerce Defendants engaged in severa l
practices to inflate its reported revenues, rendering the preceding statements in paragraphs 8 0
through 86 fraudulent
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LAW OFFICES OF
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•88 . For example, the Network Commerce Defendants caused ShopNow to prematurel y
record revenue so that it met targets for each quarter This practice was evidenced by monthly sales
reports distributed internally company-wide throughout the Class Period . For each quarter, these
reports showed a significant jump in sales in the third month of the quarter, indicating the advanced
recording of revenue to artificially inflate quarterly revenue figures
89 ShopNow also engaged in agreements and alliances with several technology and
dot corn companies . One such example was Ask Jeeves, Inc . ("Ask Jeeves") . As announced in a
joint press release on April 11, 2000, ShopNow signed an agreement with Ask Jeeves under which
Ask Jeeves would provide certain technology, called the Jeeves Advisor, to ShopNow Defendants
failed to disclose the details of the agreement, including Ask Jeeves's commitment to purchasing
advertising from ShopNow. The Network Commerce Defendants further failed to disclose that the
Jeeves Advisor technology consisted only of one employee who was good at asking questions . The
Company improperly recognized the commitment to buy ads as current revenue The Company
further recorded the Ask Jeeves technology as an asset at an inflated value As a result, the
Company's reported revenue and earnings was artificially inflated .
90 During the Class Period, the Company reached agreements with the following
companies The terms of these agreements were not disclosed to the investing public The
agreements, however, were under terms similar to the Ask Jeeves agreement, allowing the Company
to inflate its reported revenue and earnings by realizing commitments to advertise in the future as
current revenue and by recording the acquired technology as assets at inflated value s
Name of ComnanvBarnesandNoble .comSnowball cornAkamai TechnologiesNet2PhonePrivaseekInktomiRightWorksArmadillo cam
Date of Aireement or Allianc eOct. 6, 1999Dec. 3, 1999Dec 13, 1999Dec. 14, 1999Jan. 5, 2000Jan 6, 2000
Feb 23, 2000Mar. 14, 2000
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AmeriCounsel corn Mar 14, 2000PlanetofMusic com Mar 14, 2000
Further Fraudulent Statements During Balance of Class Period
91 . At Company management meetings, Walker often described the Company as a car
with no wheels speeding down a hill and described management's task as attempting to put th e
wheels on the car before it crashe d
92 With the popularity of B2C waning, the Network Commerce Defendants announce d
in a press release on May 18, 2000 that ShopNow would be renamed Network Commerce "to better
reflect the company's position as a leading provider of technology, services and commerce networks
for Internet sites ." The Company grouped its hodge-podge of Internet services and technology into
three lines of business . (i) the Network Commerce Distributed Business Network, which included
b2bNow corn, FreeMerchant com, and Ubarter com ; (ii) the Network Commerce Distributed
Consumer Network, which consisted principally of the sites ShopNow com, BottomDollar com, and
SpeedyClick.com, and (iii) the eBusiness Services division, consisting of the Company's consulting,
custom commerce solutions, and integrated marketing services .
93 . As a further spur to the market, the Company announced in the same press releas e
that it would achieve profitability, on a pro forma basis, in the fourth quarter of 2001, "significantl y
earlier than consensus analyst expectations " The press release further stated :
"We have demonstrated the strength of our business model with tremendousrevenue growth and strong gross margins . We are confident we will reachprofitability significantly ahead of schedule by further strengthening revenuegrowth, accelerating margins and lowering expenses as a percentage ofrevenue," said Dwayne Walker, chairman and chief executive officer ofNetwork Commerce Inc. "Our expansive commerce networks and largecustomer base clearly illustrate our position as a leading e-commercetechnology and services company."
94 The foregoing statement that "[w]e have demonstrated the strength of our busines s
model with tremendous revenue growth and strong gross margins" was materially false and
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is 1misleading because the Network Commerce Defendants engaged in conduct that artificially inflated
revenue, as detailed in paragraphs 87 through 90-
95 The statement by defendant Walker that "[w]e are confident we will reac h
profitability significantly ahead of schedule by further strengthening revenue growth, accelerating
margins and lowering expenses as a percentage of revenue" was materially false and misleading
because the Network Commerce Defendants knowingly or with reckless disregard failed to disclose
the conduct used to artificially inflate reported revenue, as detailed in paragraphs 87 through 90 .
96 The statement by defendant Walker that "[o]ur expansive commerce networks an d
large customer base clearly illustrate our position as a leading e-commerce technology and services
company" was materially false and misleading because the Network Commerce Defendants
knowingly or recklessly failed to disclose deceptive conduct, as detailed in paragraphs 74 through
79
97. The day after the foregoing announcement , on May 19, 2000, the Company entered
into a credit agreement with the commercial bank Imperial Bank to borrow $15 million (the "Credit
Agreement") The loan was secured by "substantially" all of the Company's assets . The Credit
Agreement required the Company to maintain certain financial ratios, as explained in further detail
in paragraphs 240 through 246 .
98 A few days later , on May 26, 2000, Walker took another $1,3 97,322 . 66 as a so-called
loan (the "May 2000 Undisclosed Payment") The so-called loan was secured by Walker's unvested
options in Company stock . Walker used the entire loan amount to purchase 771,458 shares of
Network Commerce stock below market value via the exercise of stock options on the same date .
Defendants knowingly or with deliberate recklessness failed to disclose the existence and terms of
the September 1999 and May 2000 Undisclosed Payments in the Company's quarterly results for the
periods ending June 30, 2000 and September 30, 2000, which were thereby materially false and
misleading . This so-called loan was not repaid by Walker and was forgiven by the Company in les s
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than one year. No interest payments on this so -called loan were ever paid by Walker or demande d
by the Company
99 A few days after the May 2000 Undisclosed Payment, defendant Walker gave an
I extensive interview with the publication THE WALL STREET TRANSCRIPT ("TWST"), which was
published on May 31, 2000 During the interview the following exchange took place
TWST : How do you feel about the value the market is currentlyputting on your company ?
Mr. Walker : I believe that our company is definitely undervaluedrelative to the others in the marketplace doing what we do . Our company'sstock is currently undervalued, but ShopNow coin has only been public sinceSeptember 28, 1999 .
TWST : What 's the market missing in terms of your stock price? Whyisn't it being properly valued ?
Mr. Walker: I don't not think the market has put full value on ourB2B division, the growth and size of our e-commerce network, our e-commerce technology infrastructure, or the market penetration the companyhas already achieved . I think that most of the value of the company has beenattributed to the ShopNow marketplace and not so much to the B2B side ofour busines s
100 The foregoing statements by defendant Walker were materially false and misleadin g
for the reasons stated in paragraphs 74 through 79 and 87 through 9 0
101 During the same interview, the following exchange occurred .
TWST- For investors keeping an eye on the company , what can theyuse as benchmarks of milestones to see if you're on track over the next 18months9
Mr Walker : Strong financial performance, continued strong revenuegrowth, and continued strong gross margins are basic benchmarks . . We'veindicated that we think our gross margin should be 42% or higher throughout2000. In the third quarter our margins were 36%, and m the fourth quarterthey reached 42%. Another indicator is the growth and size of our networksbecause they reflect the extent to which we magnetize those networks . Thefact that we've grown from 10,000 merchants to 50,0000 merchants in 1 2
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1 months or the fact that we have 500,000 businesses on our b2bNow Networ kand we're growing between 5,000 and 20,000 new businesses per month, are
2 indicators of future success. The size of our network is another indicator ofour future success . Then the final question is how we magnetize the base of
3 merchants and businesses across our networks That is reflected in financial4 performance.
5 TWST: What's the factor there that will drive it up to the level youwant?
6Mr Walker For ShopNow com, three factors have been driving our
7 gross margins . One is the rapid growth of our business-to-business division,which has very high gross margins, usually 50% and greater That divisio n
8 continues to be the fastest growing element of our business, and drives the9 gross margin of the company . The second is the continued strength of the
ShopNow Network, which has gross margins of 30% or better .
10 102 The preceding statements by defendant Walker were materially false and misleading
11 for the reasons stated in paragraphs 74 through 79 and 87 through 90
12 103 On June 1, 2000 - less than a week after the May 2000 Undisclosed Payment and on
13 the same day that the Company announced completion of the merger with Ubarter - Walker took
14 from the Company's coffers yet another $1,983,223 58 as a so-called loan (the "June 2000
15 Undisclosed Payment") The June 2000 Undisclosed Payment was secured by Company stock
16 pledged by Walker pursuant to a Stock Pledge Agreement Defendants knowingly or with deliberate
17 recklessness failed to disclose the existence and terms of the September 1999, May 2000, and June
18 2000 Undisclosed Payments in the Company's quarterly results for the periods ending June 30, 2000
19 and September 30, 2000, which were thereby materially false and misleading The June 2000
20 Undisclosed Payment was not repaid by Walker and was forgiven by the Company in less than one
21 year. No interest payments on this so-called loan were ever paid by Walker or demanded by the
22Company .
23 104 On June 20, 2000, the Network Commerce Defendants announced in a press release
24 that the Company had experienced "significant growth " The press release stated, in relevant part
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Network Commerce Inc (Nasdaq NWKC), a leading provider of technologyinfrastructure, services and networks for businesses, merchants, Internet sites,and wireless networks co ducting commerce online, today announced thatboth the Network Comzne ce Business Network and the Network CommerceConsumer Network have experienced significant growth in the second quarterof 2000
For the Network Commer~e Business Network, over 100,000 businesses andmerchants are now utilizing the Network Commerce platform
• Over 80,000 1 usmesses and merchants are utilizingFreeMerchant corn build-your-own-store technology .
• Over 20,000 custoipiers are using Network Commerce transactionprocessing technology
• Over 10,000 businesses are now members of Ubarter.com
For the Network Commerce' Consumer Network :
• In June 2000, over 2 ,000 registered users have been added per day
• The network now 1as over 1,400 licensed sites and over 23,000affiliated sites , an i crease of approximately 10,000 since the firstquarter of 200 0
• The three major coriponents of the Network Commerce ConsumerNetwork - ShopNovr .com, SpeedyClick . com and BottomDollar.com- experienced a combined 8.8 million unique visits the week endedJune 17, 2000 accord ing to PC Data Online
105 . The foregoing statements wre materially false and misleading for the reasons stated
in paragraphs 74 through 79 .
106. On July 24, 2000, the Comp6ny announced in a press release the financial results for
the second quarter of fiscal year 2000 . The press release stated, in relevant part
Network Commerce Inc., al leading provider of technology infrastructure,services and networks for bisinesses, merchants, Internet sites, and wirelessnetworks conducting commetrce online, today announced financial results forits second quarter ended Jun 30, 2000
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Total revenue for the second quarter was $26 9 million, an increase of 44%from revenue of $18 .7 million in the first quarter of 2000 and 101% fromrevenue of $13 4 million in the fourth quarter of 1999 . Network Commercederives revenue from the Network Commerce Business Network, whichincludes Enterprise eBuslness Services, and from the Network CommerceConsumer Network
On May 18, 2000, Network Commerce announced that it expects to achieveprofitability, on a pro forma basis consistent with current reporting, in thefourth quarter of 2001, significantly earlier than consensus analystexpectations .
As of June 30, 2000, Network Commerce's balance sheet had over $84 9million in cash, cash equivalents and short-term investments NetworkCommerce has sufficient resources to support operations beyond its targetedprofitability date of the fourth quarter of 200 1
107 The foregoing statements were materially false and misleading when made becaus e
the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that
the Company was our of compliance with material covenants of its Credit Agreement, was in default
and subject to the acceleration of all amounts due, and therefore the Network Commerce Defendants
had no good faith basis to state that "Network Commerce has sufficient resources to support
operations beyond its targeted profitability date of the fourth quarter of 2001 . "
108. The preceding statements in paragraph 108 were further materially false and
misleading for the same reasons stated in paragraphs 87 through 9 0
109 The July 24, 2000 press release further stated:
By delivering strong financial results and continuing the execution of our corestrategy, we exceeded both Wall Street's and our internal goals during thesecond quarter," commented Dwayne Walker, chairman and chief executiveofficer of Network Commerce Inc . "We unveiled our strategy to extend e-commerce to the wireless platform and completed two key acquisitions . Wealso updated our goal of achieving profitability to the fourth quarter of 2001,earlier than previous expectations . This profitability update was made
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possible as a result of our growing customer base, rising revenue, dramatically
increasing gross margins and continued efficient management of expenses
2110. The foregoing statements by Walker were materially false and misleading when made
3for the same reasons stated in paragraph 87 through 90 .
4111 On August 14, 2000, the Company filed with the SEC its quarterly report on form 10-
5Q for the quarter ended June 30, 2000 (the "2000 Second Quarter 10-Q") The 2000 Second Quarter
610-Q contained the same materially false and misleading statements as in the July 24, 2000 press
7release
S112. On August 16, 2000, the Network Commerce Defendants caused the Company to
9announce in a press release that the Consumer Network division of Network Commerce would break
10even in the fourth quarter of 2000 and reach profitability in the first quarter of 2001 . The press
I1release further stated-
12Revenue from Network Commerce's Consumer Network is comprised of fees
13 from licensing, online direct marketing programs and advertising . In thesecond quarter of 2000, the Network Commerce Consumer Networ k
1~ generated $15 .7 million in revenue, or 58% of Network Commerce's total15 revenue for the quarter, a 48% increase from $10.6 million in the first quarter
of 2000. Network Commerce also generates revenue from the Network16 Commerce Business Network, which includes the company's Enterprise
eBusiness Services17
"With the overall growth of the Network Commerce Consumer Network --11 including over 2,000 Internet sites licensing our commerce technology and the19 number of registered users growing by 30,000 a day - we are confident the
Consumer Network alone will generate over $20 million in revenue in the20 fourth quarter of 2000," said Dwayne Walker, chairman and chief executive
officer of Network Commerce. "We have continued to build on and execute21 our business model in our efforts to increase shareholder return, and we are22 confident that our business will continue to grow throughout the rest of 2000
and into 2001 . We also expect our international and wireless initiatives to ad d23 to our revenue stream for both our consumer and business commerce
networks ."24
113 . The foregoing statements were knowingly or with deliberate recklessness materially
25 false and misleading when made for the reasons stated in paragraphs 87 through 9 026
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1 114 In August, 180 days had elapsed since the Company's SPO Defendant Walker was
2 free of restrictions and lock-up agreements on his Network Commerce stock and could now sell it on
3 the open market . Defendant Walker immediately registered to sell 500,000 shares of Network
4 Commerce stock in August 2000 . In the month of August alone, Walker sold 350,000 shares of
5 Network Commerce stock, netting proceeds of nearly $2 million He did not use one penny to repay
6 the substantial "loans" of September 1999, May 2000, or June 2000 .
7 115, On August 24, 2000, the Company announced in a press release the acquisition of
8 Ivebeengood d b a. Uberworks ("UberWorks"), a company providing "multi-merchant e-commerce
9 purchasing tools and umversal shopping cart technology to Internet sites" and streamlined
10 purchasing capabilities Network Commerce acquired UberWorks for approximately $22 .8 million,
11 which included $14 5 million in Network Commerce stock, $5 9 million in assumed debt, and $2 4
12 million in non-cash deferred compensation . The August 24, 2000 press release stated in relevant
13 part .
14 Network Commerce expects to integrate the technology across both theNetwork Commerce Network and the Network Commerce Business Network
15 in the third and fourth quarters of 2000.
16 116 The preceding statements were materially false and misleading because the Network
17 Commerce Defendants knowingly or with deliberate recklessness failed to disclose that
18 The Company received two due diligence reports, each of which recommended
19 against the acquisition of Uberworks ; and
20 Contrary to the Company's stated intentions, UberWorks' technology was
21 incompatible with the Company' s existing technology and was incapable of being integrated with
22 Network Commerce.
23 117. In the August 24, 2000 press release, Walker made the following statement
24 concerning the acquisitio n
25 We fully expect this acquisition to contribute to our overall growth and to help26 us continue to move our Consumer Network towards break-even in the fourth
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1 •quarter of 2000, and to profitability in the first quarter of 2001, ahead ofinternal schedule s
118. The foregoing statement by Walker was materially false and misleading when made
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because the Network Commerce Defendants knowingly or with deliberate recklessness failed to
disclose that (a) the Company received two due diligence reports, each of which recommended
against the acquisition of Uberworks, and (b) Walker had no good faith or reasonable basis to state
that Network Commerce's Consumer Network would achieve break-even in the fourth quarter of
2000 and profitability in the first quarter of 2001, (c) UberWorks' technology was incompatible with
the Company's existing technology; and (d) the UberWorks acquisition was incapable of being
integrated with Network Commerce .
119 In order to generate market interest to finance profits from future insider sales, o n
September 11, 2000 the Network Commerce Defendants caused the Company to announce in a pres s
release that Network Commerce would exceed analyst expectations in the third quarter of 2000 . The
press release stated :
Network Commerce Inc , a leading provider of technology infrastructure,services and networks for businesses, merchants, Internet sites, and wirelessnetworks conducting commerce online, today announced the company expectsto exceed consensus analyst expectations for financial results for the thirdquarter ending September 30, 200 0
Network Commerce expects to generate over $30 million in revenue for thequarter The company also expects gross margins to continue to exceed 50percent for the third quarter, and for the pro forma loss per share to be betterin the third quarter than in previous quarter and to be better than consensusanalyst expectations for this quarter The company plans to report itscomplete third quarter financial results on Monday, October 23, 2000 .
120 The foregoing statements were materially false and misleading when made because
the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose tha t
the Company was out of compliance with material covenants of its Credit Agreement and was in
default and subject to acceleration of all amounts due .
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t !121 . The preceding statements in paragraph I23 were further materially false and
misleading for the reasons stated in paragraphs 87 through 90 .
122. The September 11, 2000 press release further state d
"We have had a very good quarter to date and are confident we will exceedconsensus analyst expectations for financial results for the third quarter," saidDwayne Walker, chairman and chief executive officer of Network Commerce ."We expect this to be the fourth straight quarter we will exceed expectationsWe are very comfortable with analyst projections for our business and arecontinuing to concentrate on delivering results for our shareholders . "
123 The preceding statements were materially false and misleading when made because
the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose tha t
the Company was out of compliance with material covenants of its Credit Agreement and therefore
it was in default and subject to acceleration of all amounts due .
124. The preceding statements in paragraph 126 were further materially false and
misleading for the reasons stated in paragraphs 87 through 90 .
125. These false and misleading statements had the desired effect, sending the Company' s
share price up from $5 .94 to $6 34 in heavy trading volume .
126. On the same day as the September 11, 2000 press release, the Network Commerce
Defendants and certain other directors and officers of the Company kicked off a "road show" or
series of meetings with investors and brokers to tout Network Commerce . The table below lists the
locations of these meetings . During all or some of these meetings, the Network Commerce
Defendants repeated the same materially false and imsleading statements as detailed above in
paragraphs 93 through 122
Date
Sep. 11, 2000
Sep. 13, 2000
Sep 14, 2000
Sep 15, 2000
Location
New York, New York
Philadelphia, Pennsylvania
Baltimore, Maryland
Washington, DC
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LAW OFFICES OF
KELLER ROHRBACK L.L.Y .
1201 THIRD AVENUE, SUITE 3200SEATTLE, WASHINGTON 98101-3052
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Sep. 27, 2000
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Oct 11, 2000
Nov 11, 2000
Dec 2, 2000
Location
San Diego, California
Los Angeles, California
Palm Springs, California
San Francisco, California
Chicago, Illinois
Minneapolis, Minnesota
Phoenix, Arizona
Santa Clara, California
127 On September 19, 2000 - in the midst of the "road show" and mere months after the
$1 .39 million May 2000 Undisclosed Payment, the $1 98 million June 2000 Undisclosed Payment ,
I and the $2 million August 2000 insider sale - Walker took yet another $556,140 .16 from the
Company as a so-called loan (the "September 2000 Undisclosed Payment") The "loan" was
secured by Walker's unvested options in Company stock . Walker used most of the loan proceeds to
acquire 125,000 shares of Company stock far below market value via the exercise of options on the
same date This so-called loan was not repaid by Walker and was forgiven by the Company withi n
seven months . No interest payments on this so -called loan were ever made by Walker or demanded
by the Company. Defendants knowingly or with deliberate recklessness failed to disclose the
existence and terms of the September 1999, May 2000, June 2000, and September 2000 Undisclosed
Payments in the Company's quarterly results for the period ending September 30, 2000 filed with th e
SEC on Form 10-Q (the "2000 Third Quarter 10-Q"), which was thereby rendered materially fals e
and misleading .
128. In the fall of 2000, Network Commerce was in further violation of material lo an
covenants of its Credit Agreement and therefore was in default and subject to acceleration of al l
amounts due As a result , the Network Commerce Defendants raised an additional $20 million fo r
the Company through a private placement from one institutional investor, Capital Venture s
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LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE, WASHINGTON 98101-3052
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•International, pursuant to a Securities Purchase Agreement dated September 28, 2000 In order to
maintain the Company's shares at artificially inflated prices, the Network Commerce Defendants
misled the investing public regarding the need for the additional funds in a press release dated
October 2, 2000 The press release stated, in relevant part .
Network Commerce Inc., a leading provider of technology infrastructure,enabling services and networks for businesses, merchants, Internet sites, andwireless networks conducting commerce online, today announced thecompany has completed a private placement of $20 million with oneinstitutional investor
The funds raised through the private placement will increase NetworkCommerce's working capital and bolster its balance sheet, adding to thecompany's already strong financial position as it moves toward profitabilityNetwork Commerce expects to become profitable, on a pro forma basisconsistent with current reporting, in the fourth quarter of 2001 .
129 The preceding statements were materially false and misleading when made because
the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that,
because the Company was not in compliance with material covenants of its bank Credit Agreement,
it was in default and subject to the acceleration of all amounts due and therefore the Network
Commerce Defendants had no good faith basis to state that "Network Commerce expects to become
profitable, on a pro forma basis consistent with current reporting, in the fourth quarter of 2001 ."
130 On October 6, 2000, after Walker had siphoned millions of dollars from th e
Company's treasury in the preceding few months, the Network Commerce Defendants caused th e
Company to announce in a press release its first staffreductions. The press release stated :
Network Commerce Inc., a leading provider of technology infrastructure,enabling service and networks for businesses, merchants, Internet sites, andwireless networks conducting commerce online, today announced it hasreduced its work force by 68 people as it moves toward its goal of achievingcompany-wide profitability in the fourth quarter of 2001 and profitability ofits Consumer Network in the first quarter of 200 1
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LAW OFFICES OF
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1201 THIRD AVENUE SUITE 3200
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• fWe have reported very strong financial results over the last several quarters
and we continue to be excited about our financial outlook for the remainder of2000, 2001 and beyond As the company continues to grow and evolve, wecontinue to become more efficient in our business operations and even morefocused on increasing revenues, improving gross margins, lowering ourexpenses and driving aggressively towards profitability," said DwayneWalker, chairman and chief executive officer of Network Commerc e
131 . The preceding statements were knowingly or recklessly materi ally false and
misleading when made because the Network Commerce Defendants knowingly or with deliberate
recklessness failed to disclose that because the Company was not in compliance with material
covenants of its bank Credit Agreement, it was in default and subject to acceleration of all amounts
due, and therefore the Network Commerce Defendants lacked any reasonable basis to announce
"company-wide profitability in the fourth quarter of 2001 and profitability of its Consumer Network
in the first quarter of 2001 ."
132 The preceding statements in paragraph 130 were materially false and misleading fo r
the reasons stated in paragraphs 87 through 90 .
133 Defendants further signaled in the press release that it would meet analyst' s
expectations for "the fourth quarter and beyond . "
134 The preceding statement was materially false and misleading for the reasons stated i n
paragraph 131 and furthermore because :
(a) Network Commerce misleadingly met analysts' expectations by inflating
revenue through the conduct described in paragraphs 87 through 90; and
(b) the Company was not in compli ance with material covenants of its Credit
Agreement and therefore was in default and subject to acceleration of all amounts due.
135 On October 23, 2000, the Network Commerce Defendants caused the Company t o
announce in a press release its financial results for the quarter ended September 30, 2000 . The press
release stated, in relevant part
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LAW OFFICES OF
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SEATTLE, WASHINGTON 98101-3052TELEPHONE ( 206) 623-1900FACSIMILE ( 206) 623-3384
0- 161 Total revenue for the third quarter was $33 .4 million, an increase of 24% from
revenue of $26.9 million in the second quarter of 2000, and an increase of2 over 340% from revenue of $7.6 million in the third quarter of 1999 Network
Commerce derives revenue from the Network Commerce Business Network,3 including eBusiness Services, and the Network Commerce Consumer4 Network. CPM based advertising revenue was approximately 3% of total
revenue in the third quarte r
5"For the fourth consecutive quarter, we have exceeded consensus analyst
6 expectations for financial performance," said Dwayne Walker, chairman andchief executive officer of Network Commerce "Our increase in revenue and
7 continuing loss reduction is indicative of the strength of our business and our8 ability to execute the business model. This performance provides a
foundation for the Consumer Network to reach profitability in the first quarte r9 of 2001 and the company to reach overall profitability in the fourth quarter
2001 on a pro forma basis ."
10 As of September 30, 2000, Network Commerce had over $87 .1 million in11 cash, cash equivalents and short-term investments as compared to $84.912 million in the second quarter of 2000 . Network Commerce has sufficient
resources to support operations beyond its targeted profitability date of the13 fourth quarter of 2001
14 136 The preceding statements were materially false and misleading when made because
15 the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that :
16 (a) Network Commerce "exceeded consensus analyst expectations" by inflating
17 revenue through the conduct describe in paragraphs 87 through 90 ; and
18 (b) the Company was not in compliance with material covenants of its bank credit
19 agreement and therefore was in default and subject to acceleration of all amounts due ; and thus the
20 Company lacked the financial resources "to reach profitability in the first quarter of 2001 and the
21 company to reach overall profitability in the fourth quarter 2001 on a pro forma basis ."
22 137. A few days later, on October 25, 2000, in a seemingly unquenchable thirst for funds
23 from the corporate treasury, Walker took yet another $250,000 as a so-called loan (the "October
24 2000 Undisclosed Payment"), amounting to over $4 million in such payments since May 2000 alone .
25 The "loan" was secured by Walker's unvested options in Company stoc k
26
CONSOLIDATED AMENDED LAW OFFICES OF
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46 01 138. Having completed the "road show" and successfully convinced the investing public
2 that the Company was able to continue operations until it reached profitability, on November 16,
3 2000, with undisclosed regularity Walker took another $100,000 from the Company as a so-called
4 loan (the "November 2000 Undisclosed Payment") . The November 2000 Undisclosed Payment was
5 secured by Walker's "unvested options to purchase common stock of [Network Commerce] held by
6 [Walker] . "
7 139. On November 21, 2000, the Network Commerce Defendants caused the Company to
8 announce in a press release that it had been ranked one of the fastest growing technology companies
9 in the United States In the press release, defendant Walker commented as follows :
10 Being named the fastest growing technology companies in the nation is a great11 honor for us . . said Dwayne Walker, chairman and chief executive officer of
Network Commerce
12 140. The preceding statement was materially false and misleading for the same reasons
13 stated in paragraphs 87 through 90 .
14 141. Between November 20, 2000 and November 22, 2000, Walker sold 134,326 shares of
15 Company stock, reaping proceeds of $260,51 4
16 142. On December 8, 2000, the Network Commerce Defendants announced in a press
17 release the abrupt resignation of Network Commerce's Chief Financial Officer, Alan D . Koslow .
18 On the same day, in an attempt to soften the market's reaction to this surprise, the Company issued a
19 separate press release, announcing that the Company would achieve profitability by the third quarter
20 of 2001, one full quarter ahead of the Company's previous representation on this subject The press
21 release stated:
22 Network Commerce Inc, the global technology infrastructure and services23 company, today announced it expects to reach profitability, on a pro forma
basis consistent with current reporting, in less than ten months, ahead of24 schedule
25 The company expects continued strong business growth, a reduction in26 operating costs and a reduction in work force to result in an approximate $40
CONSOLIDATED AMENDED LAW OFFICES OFCLASS ACTION COMPLAINT - 41 KELLER ROHRBACK L L .P .
1201 THIRD AVENUE SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHONE (2o e23-190
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million cost savings in 2001 . Network Commerce also expects the NetworkCommerce Consumer Network, which currently represents more than 70percent of the company's revenue, to reach profitability as expected in Q12001 .
143 . The preceding statements were materially false and misleading when made becaus e
the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that
the Company was not in compliance with material covenants of its bank Credit Agreement, was in
default and subject to acceleration of all amounts due, and therefore the Network Commerce
Defendants lacked any good faith basis to state that the Company "expects to reach profitability, on
a pro forma basis consistent with current reporting, in less than ten months "
144 The December 8, 2000 press release further stated .
"Continued strong growth, decreased expenses and the efficient restructuringof the company are three keys for us to reach profitability earlier thanpreviously expected," said Dwayne Walker, chairman and chief executiveofficer of Network Commerce "As the company continues to grow andevolve, we will continue to evaluate efficiencies in our business operations aswe accelerate toward our goal of profitability . "
145 The foregoing statements were materially false and misleading for the reasons state d
in paragraph 14 3
The Truth Begins To Emerge
146. On January 23 , 2001, the Network Commerce Defendants caused the Company t o
announce the following :
Network Commerce Inc., the global technology infrastructure and servicescompany, today offered revised revenue and net loss guidance for the fourthquarter 2000 and fiscal year 200 1
In addition, the company announced workforce reductions and other cost-cutting measures In response to softness in consumer shopping, the companyplans to shut down its consumer shopping network known as ShopNow coinduring the first quarter of 200 1
Network Commerce will continue to aggressively expand its TechnologyInfrastructure and Services business The company expects the TechnologyInfrastructure and Services business, which includes domain registratio n
CONSOLIDATED AMENDED LAW OFFICES OF
CLASS ACTION COMPLAINT - 42 KELLER ROHRBACK L .L .P .1201 THIRD AVENUE SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHON
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S 01 services, hosting services, commerce services, email marketing services and
business services to expand to more than 40% of revenues for 2001 The2 company also generates revenue through its Portal Group, consisting of online
sites and portals As a result the company expects a gross margin of more3 than 70% for 2001
4 Network Commerce currently expects that its higher gross margins for 2001,5 coupled with significant cost reductions, will keep the company on target to
reach pro forma profitability in the third quarter of 2001, and cash flow6 profitability by the fourth quarter of 2001 .
7 147 The Company announced further in the press release that it would reduce its
8 workforce by approximately 145 people and that its United Kingdom sales office, opened only five
9 months earlier, would be closed
10 148. The preceding statements in paragraph 146 were materially false and misleading
11 because the Network Commerce Defendants knowingly or with deliberate recklessness failed to
12 disclose that the Company was not in compliance with material covenants of its Credit Agreement
13 and that it was in default and subject to acceleration of all amounts du e
14 149 The news shocked the market and sent Network Commerce's stock plummeting 42
15 percent on January 23, 2001 from $1 31 per share to $0 75 per share before trading of the
16 Company's stock was halted by NASDAQ The Company's stock finally closed at $0 947 per share,
17 down nearly 30 percent
18 150 Defendants further shocked the market in its earnings release for the fourth quarter
19 and year end for 2000. The January 29, 2001 press release stated, in relevant part.
20 During the fourth quarter 2000, Network Commerce incurred $16 8 million inrestructuring charges stemming primarily from the closing of certain business
21 units. In addition, the company recognized a $124 .5 million impairment22 charge in the fourth quarter 2000 relating to certain acquired intangible asset s
and goodwill from business acquisitions, cost-basis investments and23 marketable equity securities.
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25 As of December 31, 2000, Network Commerce had $49 9 million in cash,26 cash equivalents and short-term investments, compared to $87 1 million in th e
CONSOLIDATED AMENDED LAW OFFICES OFCLASS ACTION COMPLAINT - 43 KELLER ROHRBACK L .L.P .
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SEATTLE WASHINGTON 96101-3052TELEPHONE (206) 823-190 0
N %cuENTS~25259\1~CompLmNTAmENDED 111301-DOC FACSIMILE ( 206) 823-3384
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1 third quarter of 2000. The company expects to have approximately $12
million to $14 million in cash, cash equivalents and short-term investments as2 of June 30, 2001, and to have approximately $8 million to $10 million in cash,
cash equivalents and short-term investments as of December 31, 2001, th e3 same quarter in which the company expects to be cash flow positive The4 company currently expects to be profitable, on a pro forma basis consistent
with current reporting, in the third quarter 200 1
5 151 As of December 31, 2000, Network Commerce was out of compliance with working
6 capital covenants under its bank credit agreement The lender has waived the company's obligation
7 to comply with those financial covenants for the period ended December 31, 2000, but has re-
8 instituted existing working capital covenants going forward . The company is now in the process of
9 renegotiating certain provisions of the agreement . The violation of debt covenants and the historical
10 results of operations have led auditors to inform the company that they expect to issue a going
11 concern opinion in the company's annual report if facts and circumstances do not change .
12 152 The foregoing statement that "[t]he company currently expects to be profitable, on a
13 pro forma basis consistent with current reporting, in the third quarter 2001" was materially false and
14 misleading when made for the reasons stated in paragraphs 87 through 90 and 14 8
15 153. The news sent the Company's stock reeling from $0 .8125 per share on January 29,
16 2001 to close at $0 6875 per share on January 31, 2001 The stock price represented a 97 percent
17 drop from the Class Period high of $23 4375 per share .
18 154 On February 9, 2001, Walker sold 425,000 shares of Company stock, reaping
19 proceeds of $190,675 As of February 9, 2001, Walker still held 1,833,802 shares of Company
20 stock .
21The Truth Is Revealed
22 155. On April 2, 2001 the Company filed a notification of late filing of its 2000 annual
23 report on form NT 10-K (the "Notification") . The Notification stated:
24As a result of the following, the Company is not currently able to complete its
25 Annual Report on Form 10-K without unreasonable effort .
26
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The Company currently is conducting a detailed analysis of events subsequentto December 31, 2000 The Company requires additional time to complete itsanalysis of the subsequent events and their potential impact on the value ofcertain intangible asset s
Also, the Company anticipates finalizing material modifications to its presentcredit facility These modifications may materially affect the information tobe provided in the Form 10-K.
156 On April 17, 2001, the Company filed with the SEC its annual report for the fiscal
year ended December 31, 2000 on form 10-K (the "2000 10-K") The 2000 10-K stated, in relevan t
part
We believe that our cash reserves and cash flows from operations will beadequate to fund our operations through the first quarter of 2001 . Ifadditional financing is not available to us we may need to dramatically changeour business plan, sell or merge our business, or face bankruptcy .
Our independent accountants have issued a "going concern" opinion is theirreport to our financial statements for the year ended December 31, 2000,citing recurring operating losses, reduced working capital and violation ofdebt covenants
157. In the 2000 10-K, the Company further disclosed that it had been notified of a default
by one of its creditors The 2000 10-K stated :
On April 3, 2001, the Company received a notice of default from the holdersof the $20 million of convertible notes for an alleged violation of certainprovisions of the convertible notes relating to the breach of certain negativefinancial covenants contained in the credit agreement for $15 .0 million with acommercial bank and the breach by the Company of certain material terms ofthe Securities Purchase Agreement dated as of September 28, 2000 Thenotice of default demanded that the Company redeem the convertible notes onor before April 9, 2001 for an amount equal to $17.25 million, which amountrepresents 115% of the aggregate principal amount of the remainingconvertible notes . The Company responded to the notice of default on April4, 2001 and denied that an event of default occurred If the Company were tobe in default of the convertible notes and if the default is not cured, or waivedby the holder of the convertible notes, and the Company is required to redeemthe amounts outstanding under the convertible notes, the holder could seek
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LAW OFFICES OF
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remedies against the Company . . In addition, the Company may have noalternative but to file a petition in bankruptcy .
158 . The 2000 10-K also disclosed the transactions engaged in by Walker in raiding the
corporate treasury of approximately $4 5 million in so -called loans between September 28, 1999 and
November 16, 2000 and that the Company was essentially forgiving the "debt" or giving the mone y
to Walker. The 2000 10-K stated-
In April 2001, the Company settled potential claims held by Mr DwayneWalker, the Company's Chairman and Chief Executive Officer, against theCompany arising from the withdrawal of Mr. Walker's shares of theCompany's common stock from the Company's secondary public offeringcompleted in February 2000 The terms of the settlement are set forth in aletter agreement dated as of April 5, 2001 between the Company and Mr .Walker .
The settlement provides that the Company will purchase 262,000 shares of itscommon stock from Mr Walker in exchange for the tender of a $3 8 millionnote payable from the Company (Company Note) . In connection with thesettlement, the Company agreed to consolidate all of Mr . Walker'soutstanding promissory notes to the Company, executed by him sinceSeptember 28, 1999, which totaled $4 .5 million as of December 31, 2000 andwere recorded in Notes Receivables from employees and Subscriptionsreceivable . Principal and interest, at 7% per year, are due on March 31, 2011Following the Company's purchase of the 262,000 shares, Mr Walker mayendorse the Company Note to the Company in partial satisfaction of the newloan. In addition, Mr Walker agreed to transfer up to 1,171,158 shares ofCompany stock to the Company as additional payment of the loan . TheCompany agreed to reduce the balance of the loan by the fair market value ofthe 1,171,158 shares on the date of the transfer . To the extent Mr Walker'soutstanding promissory note has not been completely repaid by the aboveactions, the Company will immediately extinguish any remaining obligationMr. Walker may owe under the promissory note . As a result of the settlement,the Company will recognize approximately $4 .5 million dollar expense in thefirst quarter of 2001 .
159. The market reacted with surprise and horror to the news, sending the stock price o f
the Company down nearly 20 percent from $0 .156 to close at $0 125 on April 18, 2001 .
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4 S
1 SUBSTANTIVE ALLEGATIONS COMMON TOVIOLATIONS OF THE SECURITIES ACT
2Materially False And Misleading Statements
3 in Connection with the Initial Public Offering
4 160 On June 21, 1999, the IPO Defendants announced the proposed initial public offering
5 of ShopNow.com (the "IPO" )
6 161 On June 18, 1999, in connection with the IPO, the Company filed with the SEC a
7 Registration Statement on Form S-1 with the SEC. The Company filed several amendments to the
8 Registration Statements on Forms S-1/A dated July 30, 1999, August 25, 1999, August 31, 1999,
9 September 9, 1999, September 22, 1999, and September 28, 1999, whereupon it was declared
10 effective by the SEC (the "IPO Registration Statement" )
11 162 The IPO Registration Statement was materially false and misleading because it
12 omitted all facts relating to a so-called loan of $223,313 60 to Walker evidenced by a promissory
13 note dated September 28, 1999 (the "September 1999 Undisclosed Payment") . Pursuant to the
14 September 1999 Undisclosed Payment, Walker would forfeit unvested options if he failed to repay
15 the Company pursuant to the terms of the note .
16 163 This so-called loan was not repaid by Walker when it came due in September 2000,
17 or at any other time No amendment to the terms of the note was ever disclosed Walker was never
18 forced to forfeit any rights for failure to repay the so-called loan.
19 164. The IPO Registration Statement, including the September 28, 1999 amendment,
20 stated on page 20 in a section titled "Use of Proceeds "
21 The principal purposes of the offering are to obtain capital to repayindebtedness and for working capital and general corporate purposes, establish
22 a public market for our common stock and facilitate future access to public23 markets. We intend to use the net proceeds from this offering as follows :
24
25 The remainder of these net proceeds, or approximately $65 5 million, will beused for working capital and general corporate purposes . We do not currently
26
CONSOLIDATED AMENDED LAW OFFICES OF
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1 have a specific plan for the use of these proceeds The amounts that weactually expend for working capital will vary significantly depending on a
2 number of factors, including future revenue growth, if any, and the amount ofcash we generate from operations As a result, we will retain broad discretion
3 in allocating the net proceeds of this offering .
4 165. The preceding statements were materially false and misleading because the IPO
5 Defendants failed to disclose that proceeds from the IPO would be used to pay Walker compensation
6 of $223,313 60 in exchange for a promissory note to the Company executed by Walker on
7 September 28, 1999, the effective date of the IPO Registration Statement The note was secured
8 only by Walker's unvested options in Company stock . The IPO Defendants failed to disclose the
9 existence and terms of this so-called loan . The IPO Defendants failed to disclose the existence and
10 terms of this contemplated means of undisclosed executive compensation . The IPO Defendants'
11 disclosure of "Use of Proceeds" was therefore materially false and misleadin g
12 166. The IPO Registration Statement, including the September 28, 1999 amendment,
13 stated on page 62 in a section titled "Executive Contracts, Termination of Employment and Change-
14 In-Control Arrangements"
15 ShopNow has entered into a written employment agreement with Mr . Walker16 effective as of July 1, 1999. This Agreement may be terminated by either Mr .
Walker or ShopNow at any time, upon written notice to the other . The17 agreement provides for an initial annual salary of $400,000 and a yearly bonus
of up to $200,000 based upon the achievement of performance criteria18 specified by the compensation committee Mr . Walker's salary is to be19 reviewed at the end of each calendar year by the compensation committee an d
adjusted at the board's sole discretion, provided, however, that Mr . Walker's20 salary may not be adjusted downward without his consent Pursuant to the
agreement, Mr Walker will receive, as of the date of this offering, an option21 to purchase 500,000 shares of common stock at an exercise price equal to the
initial per share offering price, which option will vest in four equal semi-22 annual installments subject to Mr. Walker's continued employment with23 ShopNow. After the first year of the agreement, ShopNow will grant M r
Walker during each of the next eight quarters an option to purchase up to24 125,000 shares of common stock at an exercise price equal to the closing price
of ShopNow's common stock on the Nasdaq National Market on the date o f25 grant, which option will vest in four equal semi-annual installments subject to
26 Mr. Walker's continued employment with ShopNow .
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167 The preceding statements were false and materially misleading because the IP O
Defendants failed to disclose that Walker would receive compensation in the form of additional so-
called loans that mirrored the September 1999 Undisclosed Payment . Neither the September 1999
Undisclosed Payment nor similar subsequent payments qualified as working capital or served a
general corporate purpose The so-called loans were secured only by Walker's unvested options in
Company stock The Company's disclosure of "Executive Contracts, Termination of Employment
and Change-In-Control Arrangements" was therefore materially false and misleading
168. The IPO Registration Statement, including the September 28, 1999 amendment ,
stated on page 681n a section titled "Related Transactions with Executive Officers, Directors and 5 %
Shareholders"
In June 1999, we granted Mr. Walker . . options to purchase 450,000 . . .shares of common stock . . . at an exercise price equal to the low point of thefiling range as indicated in our preliminary prospectus for this offering, or$10 00 per share These options vest over a two-year period commencingafter the closing of this offering .
We believe that all of these transactions were made on terms as favorable tous as we would have received from unaffiliated third parties
169. The preceding statements were materially false and misleading for the same reason s
stated in paragraph 162 through 163 . This was a related-party transaction that was undertaken on
terms far more favorable than one with an unaffiliated third party.
170 The IPO Registration Statement, including the September 28, 1999 amendment ,
stated, in relevant part, on page 73 in a section titled "Shares Eligible for Future Sale" :
Of the remaining 26,254,706 shares of common stock held by existingshareholders, 26,159,231 shares will be deemed "restricted securities" as thatterm is defined in Rule 144 . All of these restricted securities will be subject tolock-up agreements providing that, with certain limited exceptions, theshareholder will not offer, sell, contract to sell or otherwise dispose of anysecurities of ShopNow that are substantially similar to the common stock,including but not limited to any securities that are convertible into orexchangeable for, or that represent the right to receive, common stock or anysuch substantially similar securities (other than pursuant to employee stock
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1 option plans existing on, or upon the conversion or exchange of convertible o r
exchangeable securities outstanding as of, the date of the lock-up agreement)2 for a period of 180 days after the date of this prospectus without the prior
written consent of Dain Rauscher Wessels, a division of Dam Rausche r3 Incorporated. As a result of these lock-up agreements, notwithstanding4 possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, none of these shares may be sold until 180 days after the date of this5 prospectus.
6 171 The preceding statements were materially false and misleading for the same reasons
7 stated in paragraph 162 through 163 The contemplated transaction allowed Walker to sell his
8 restricted shares of stock to the Company in contravention of the 180-day restriction on the sale of
9 "restricted securities" held by Walker. The Company's disclosure of "Shares Eligible for Future
10 Sale" was therefore materially false and misleading.
11 172. The foregoing omissions and false and misleading statements were material to
12 plaintiffs because (1) they reflected that the Company and its management were focusing their
13 attention primarily on the welfare of defendant Walker and not that of the Company or its
14 stockholders ; (ii) they reflected a propensity of the Company and its management to engage in non-
15 arms'-length transactions with related parties on terms unfavorable to the Company, (in) they
16 reflected a propensity of the Company and its management to not disclose relevant information in a
17 fair and timely manner, and (iv) they demonstrated a lack of confidence of the CEO in the value of
18 his stock options and contingent compensation and thereby lack of confidence in the long-term
19 prospects of the Company itsel f
20 173. On September 29, 1999, the Company filed a prospectus on Form 424B4 and a
21 prospectus supplement on Form 42483 on October 15, 1999 (collectively, the "IPO Prospectus") In
22 a section titled "Use of Proceeds" on page 21, the IPO Prospectus repeated the same materially false
23 and misleading statements as in the IPO Registration Statement, as detailed in paragraph 16 4
24 174 For the same reasons set forth in paragraph 165, this failure to disclose the payment to
25 Walker in the IPO Prospectus rendered it materially false and misleadin g
26
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• •175. In a section titled "Executive Contracts, Termination of Employment and Change-In-
Control Arrangements" on page 63, the IPO Prospectus repeated the same materially false and
misleading statements as in the IPO Registration Statement, as detailed in paragraph 16 6
176. For the same reasons set forth in paragraph 167, this failure to disclose the payment t o
Walker in the IPO Prospectus rendered it materially false and misleading .
177. In a section titled "Related Transactions with Executive Officers, Directors and 5 %
Shareholders" on page 67, the IPO Prospectus repeated the same materially false and misleading
statements as in the IPO Registration Statement, as detailed in paragraph 168 .
178 For the same reasons set forth in paragraph 169, this failure to disclose the payment to
Walker in the IPO Prospectus rendered it materially false and misleading .
179. In a section titled "Shares Eligible for Future Sale" on pages 74-75, the IPO
Prospectus repeated the same materially false and misleading statements as in the IPO Registratio n
Statement, as detailed in paragraph 170 .
180 For the same reasons set forth in paragraph 171, this failure to disclose the payment t o
Walker in the IPO Prospectus rendered it materially false and misleadin g
181 The underwriting of the IPO was managed by underwriters Dain Rauscher, Pipe r
3affray, and SoundView According to the IPO Prospectus, the underwriting group (of which the
IPO Underwriter Defendants were members) was to receive a commission of $0.84 per share, or a
total of $6,090,000, based on the spread between the per share proceeds to Network Commerce
($11 .16) and the IPO price to the public ($12 .00 per share). Pursuant to the IPO Prospectus and an
Underwriting Agreement, Network Commerce agreed to sell the underwriters 7,250,000 share s
issued in connection with the Offering, with Dam Rauscher receiving 2,830,500 shares, Piper Jaffray
receiving 1,415,250 shares, and SoundView receiving 2,044,250 . The remaining shares were
offered and sold to the other members of the underwriting group . As a result of the IPO, ShopNow
received $80.9 million in net proceeds
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Materially False and Misleading Registration Statementin Connection with the Secondary Public Offenn a
182 On January 20, 2000, ShopNow filed with the SEC a Registration statement on Form
S-1 for the proposed secondary public offering of 8,500,000 shares of ShopNow common stock (th e
"SPO") The Registration Statement was amended on January 31, 2000 and again on February 10,
2000, whereupon it was declared effective by the SEC (the "SPO Registration Statement")
183 The SPO Registration Statement was materially false and misleading because i t
omitted all facts relating to the September 1999 Undisclosed Payment
184 The SPO Registration Statement, including the February 10, 2000 amendment, state d9
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on page 13 in a section titled "Use of Proceeds "
We estimate that the net proceeds to us from the sale of the 8,550,000 sharesof common stock offered by us will be approximately $134.8 million, at anassumed public offering price of $16 75 per share, and after deducting theunderwriting discounts and commissions and estimated offering expensespayable by us . If the underwriters' over-allotment option is exercised in full,we estimate that our net proceeds from this offering will be $158 6 millionWe will not receive any proceeds from the sale of shares by sellingshareholders .
The principal purposes of this offering are to obtain working capital forgeneral corporate purposes, including expansion of sales and marketingactivities and research and development. We may use a portion of the netproceeds to acquire or invest in complementary businesses, products andtechnologies .
185 The preceding statements were materially false and misleading because the SP O
Defendants failed to disclose that proceeds from the SPO would be used to pay Walker
compensation in the form of additional so-called loans that mirrored the September 1999
Undisclosed Payment Neither the September 1999 Undisclosed Payment nor subsequent payments
qualified as working capital or served a general corporate purpose . The so-called loans were secured
only by Walker's unvested options in Company stock The Company's disclosure of "Use of
Proceeds" was therefore materially false and misleading .
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186 The SPO Registration Statement, including the February 10, 2000 amendment, state d
on page 45 in a section titled "Employment Contracts, Termination of Employment and Change-In-
Control Arrangements "
ShopNow has entered into a written employment agreement with Mr . Walkereffective as of July 1, 1999 This Agreement may be terminated by either MrWalker or ShopNow at any time, upon written notice to the other Theagreement provides for an initial annual salary of $400,000 and a yearly bonusof up to $200,000 based upon the achievement of performance criteriaspecified by the compensation committee. Mr. Walker's salary is to bereviewed at the end of each calendar year by the compensation committee andadjusted at the board's sole discretion, provided, however, that Mr Walker'ssalary may not be adjusted downward without his consent Pursuant to theagreement, Mr Walker will receive, as of the date of this offering, an optionto purchase 500,000 shares of common stock at an exercise price equal to theinitial per share offering price, which option will vest in four equal semi-annual installments subject to Mr . Walker's continued employment withShopNow. After the first year of the agreement, ShopNow will grant MrWalker during each of the next eight quarters an option to purchase up to125,000 shares of common stock at an exercise price equal to the closing priceof ShopNow's common stock on the Nasdaq National Market on the date ofgrant, which option will vest in four equal semi-annual installments subject toMr Walker's continued employment with ShopNo w
187. The preceding statements were materi ally false and misleading because the SPO
Defendants failed to disclose that Walker was paid $223,313 .60 in exchange for a promissory note to
the Company executed by Walker on September 28, 1999 By the terms of the promissory note, it
was secured only by Walker's invested options in Company stock . Defendants failed to disclose the
existence and terms of this promissory note . The Company's disclosure of "Executive Contracts,
Termination of Employment and Change-In-Control Arrangements" was therefore materially false
and misleading
188 The SPO Registration Statement, including the February 10, 2000 amendment, stated23
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on page 49 in a section titled "Related Transactions with Executive Officers, Directors and 5 %
Shareholders" .
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I In June 1999, we granted Mr Walker . options to purchase 450,000shares of common stock . at an exercise pace of $10 00 per share On
2 September 27, 1999, we granted Mr. Walker options to purchase 500,0003 shares of common stock with an exercise price of $12 0 0
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5 We believe that all of these transactions were made on terms as favorable tous as we would have received from unaffiliated third parties .
6 189. The preceding statements were materially false and misleading for the same reasons
7 stated in paragraph 183 This was a related party transaction that was undertaken on terms far more
8 favorable than one with an unaffiliated third party .
9 190. The SPO Registration Statement, including the February 10, 2000 amendment, stated,
10 in relevant part, on pages 56-57 in a section titled "Shares Eligible for Future Sale" :
11Of the remaining 41,568,035 shares of common stock held by existing
12 shareholders, 33,107,310 shares will be deemed restricted securities as thatterm is defined in Rule 144 . Of these restricted securities 14,189,089 ar e
13 subject to lock-up agreements that expire on March 27, 2000 and 10,374,42914 shares are subject to lock-up agreements that expire 90 days after the date of
this prospectus The lock-up agreements provide that, with certain limite d15 exceptions, the shareholder will not offer, sell, contract to sell or otherwise
dispose of any securities of ShopNow that are substantially similar to the16 common stock, including but not limited to any securities that are convertibl e
into or exchangeable for, or that represent the right to receive, common stock17 or any such substantially similar securities (other than pursuant to employee18 stock option plans existing on, or upon the conversion or exchange o f
convertible or exchangeable securities outstanding as of, the date of the lock-19 up agreement) for the periods that expire on March 27, 2000 and 90 days after
the date of this prospectus, respectively without the prior written consent o f20 Damn Rauscher Wessels, the managing underwriter of our initial public21 offering, and J.P. Morgan & Co , respectively .
22The preceding statements were materially false and misleading for the same reasons stated in
23 paragraph 183 . The contemplated transaction allowed Walker to sell his restricted shares of stock to
24the Company in contravention of the 180-day restriction on the sale of "restricted securities" held by
25 Walker. The Company's disclosure of "Shares Eligible for Future Sale" was therefore matenally
26 false and misleading
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•191 The foregoing omissions and false and misleading statements were material to
plaintiffs because (i) they reflected that the Company and its management were focusing their
attention primarily on the welfare of defendant Walker and not that of the Company or its
stockholders; (ii) they reflected a propensity of the Company and its management to engage in non-
arms'-length transactions with related parties on terms unfavorable to the Company ; (iii) they
reflected a propensity of the Company and its management to not disclose relevant information in a
fair and timely manner, and (iv) they demonstrated a lack of confidence of the CEO in the value of
his stock options and contingent compensation and thereby lack of confidence in the long-term
prospects of the Company itself.
192. On February 16, 2000, the Company filed a prospectus on Form 424B1, the "SP O
Prospectus." In a section titled "Use of Proceeds" on page 13, the SPO Prospectus repeated th e
same materially false and misleading statements as in the SPO Registration Statement, as detailed in
paragraph 184 .
193. For the same reasons set forth in paragraph 185, this failure to disclose the Walker
payment in the SPO Prospectus rendered it materially false and misleading .
194. In a section titled "Employment Contracts, Termination of Employment and Change-
In-Control Arrangements" on page 45, the SPO Prospectus repeated the same materially false an d
misleading statements as in the SPO Registration Statement, as detailed in paragraph 18 6
195 . For the same reasons set forth in paragraph 187, this failure to disclose the Walker
payment in the SPO Prospectus rendered it materially false and misleading
196. In a section titled "Related Transactions with Executive Officers, Directors and 5%
Shareholders" on page 49, the SPO Prospectus repeated the same materially false and misleadin g
statements as in the SPO Registration Statement, as detailed in paragraph 188 .
197 . For the same reasons set forth in paragraph 189, this failure to disclose the Walker
payment in the SPO Prospectus rendered it materially false and misleading .
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0 •198. In a section titled "Shares Eligible for Future Sale" on pages 56-57, the SP O
Prospectus repeated the same materially false and misleading statements as in the SPO Registration
Statement, as detailed in paragraph 190 .
199. For the same reasons set forth in paragraph 191, this failure to disclose the Walker
payment in the SPO Prospectus rendered it materially false and misleading
200 The underwriting of the SPO was managed by underwriters JP Morgan, Piper Jaffray ,
CIBC, and PaineWebber . According to the SPO Prospectus, the underwriting group (of which the
SPO Underwriter Defendants were members) was to receive a commission of $0 76 per share, or a
total of $6,090,000, based on the spread between the per share proceeds to Network Commerce
($13 .7387) and the IPO price to the public ($14.50 per share). Pursuant to the IPO Prospectus and
an Underwriting Agreement, Network Commerce agreed to sell the underwriters 8,000,000 shares
issued in connection with the SPO, with JP Morgan receiving 2,816,000 shares, Piper Jaffray
receiving 1,408,000 shares, CIBC receiving 1,408,000 shares, and PaineWebber receiving 1,408,000
shares The remaining shares were offered and sold to the other members of the underwriting group .
201 . As a result of the SPO, ShopNow received proceeds of $108 .7 million .
Materially False and Misleading StatementsIn Connection With The IJbarter Merger
202 On December 21, 1999, the Network Commerce Defendants caused ShopNow t o
announce in a press release the proposed acquisition of Ubarter com (the "Ubarter Merger")
Ubarter was an online forum allowing businesses to buy and sell products and services without the
use of cash Network Commerce intended to generate revenue from Ubarter by charging a five to
ten percent cash fee on every Ubarter transaction .
203. The June 1, 2000 press release, announcing completion of the acquisition, touted th e
proposed Ubarter Merger, statin g
"[T]hrough our existing Network Commerce customer base of over 700,000businesses and merchants, we expect to substantially grow the Ubarter .combarter exchange over the next 12 months," said Dwayne Walker, chairman
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and chief executive officer of Network Commerce Inc "We plan to extendbarter services across our business-to-business properties, increasing revenueby increasing the number of transactions conducted and offering ourcustomers a new way to conduct commerce online "
Network Commerce will receive a five to ten percent cash transaction feeevery time an Ubarter corn member buys or sells an item. Over the last 90days, Ubarter.com members have conducted over $10 million in trading. ForUbarter.com fees collected per member are up 47 percent over the past sixmonths, and the number of items available on the Web site is up 136 percentover the same time period .
The acquisition will further add additional members, inventory andtransactions to the Ubarter com system and will introduce thousands of newbusinesses and merchants to our online trading forum," said Liad Meidar,chief executive officer of Ubarter .com "Not only will our current customershave access to the full range of services offered by Network Commerce, butthis acquisition exponentially increases the number of potential Ubarter compartners "
204 The forgoing statements were materially false and misleading because the Networ k
Commerce Defendants failed to disclose that (i) the forecasts and projections for cash flows from
Ubarter were grossly inaccurate, and (ii) Ubarter required significant capital investments to operate
and attract meaningful revenues, including a change in user interface and a new back-end
management system
205 . On March 14, 2000, ShopNow filed with the SEC a Registration Statement on Form
S-4 in connection with the Ubarter Merger. The Registration Statement/Proxy Statement/Prospectu s
was amended on May 8, 2000, whereupon it was declared effective by the SEC (the "Ubarte r
Registration Statement")
206 The Ubarter Registration Statement was materially false and misleading because it
omitted all facts relating to the September 1999 Undisclosed Payment .
207 That so-called loan was not repaid by Walker when it came due in September 2000 or
at any other time No amendment to the terms of the note was ever disclosed Walker was neve r
forced to forfeit any rights for failure to repay the so-called loan .
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• t208 The Ubarter Registration Statement stated in a section entitled "Risk Factors" on page
SHOPNOW COM MAY NOT BE ABLE TO SUCCESSFULLYINTEGRATE UBARTER COM AND ACHIEVE THE BENEFITSEXPECTED TO RESULT FROM THE MERGER.
The acquisition of Ubarter.com is intended to expand ShopNow corn'scapability to enable businesses to exchange products and services IfShopNow.com is unable to successfully complete the acquisition ofUbarter corn and successfully integrate Ubarter corn's businesses,technologies and personnel, its ability to increase product and serviceofferings will be reduced. This could cause ShopNow .corn to lose business toits competitors, and ShopNow corn's operating results could suffer .
The acquisition of Ubarter corn may involve numerous risks , including
- diverting management's attention from other business concerns ;
- being unable to maintain uniform standards, controls, procedures andpolicies ,
- entering markets in which ShopNow.com has no direct priorexperience ;
- improperly evaluating new services and technologies or otherwisebeing unable to fully exploit the anticipated opportunity ; and
- being unable to successfully integrate the acquired businesses,technologies and other assets
If ShopNow.com inaccurately assessed Ubarter com's businesses ortechnologies, its business could suffer . In addition, this acquisition mayinvolve the assumption of obligations or large one-time write-offs andamortization expenses related to goodwill and other intangible assets. Any ofthe factors listed above would adversely affect ShopNow .com's results ofoperations.
209 The preceding statements were materially false and misleading because the Network
Commerce Defendants failed to disclose that (a) the forecasts and projections for cash flows fro m
Ubarter were grossly inaccurate ; and (b) Ubarter required significant capital investments to operate
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and attract meaningful revenues, including a change in user interface and a new back-en d
management system
210 The Ubarter Registration Statement stated on page 82 in a section titled "Executive
Compensation" that for fiscal year 1999 defendant Walker earned a salary of $321,923, a bonus o f
$101,566, and received stock options for 950,175 shares
211 . The preceding statements were materially false and misleading because the Networ k
Commerce Defendants failed to disclose that they planned to pay Walker compensation in the form
of additional so-called loans that mirrored the September 1999 Undisclosed Payment . Indeed, the
Company made the May 2000 Undisclosed Payment prior to, and the June 2000 Undisclosed
Payment on the same day as, the Company's announcement that the Ubarter merger was completed,
as described below in paragraph 217 And, the Network Commerce Defendants evidently planned
those payments before they were actually made . Neither the September 1999 Undisclosed Payment
nor subsequent payments qualified as working capital or served a general corporate purpose The
so-called loans were secured only by Walker's unvested options in Company stock The Company's
disclosure of "Executive Compensation" was therefore materially false and misleadin g
212. The Ubarter Registration Statement stated on page 84 in a Section title d
"Employment Contracts, Termination of Employment and Change-in-Control Arrangements"
ShopNow.com has entered into a written employment agreement with MrWalker effective as of July 1, 1999. This agreement may be terminated byeither Mr Walker or ShopNow.com at any time, upon written notice to theother. The agreement provides for an initial annual salary of $400,000 and ayearly bonus of up to $200,000 based on the achievement of performancecriteria specified by the compensation committee . Mr. Walker's salary is tobe reviewed at the end of each calendar year by the compensation committeeand adjusted at the board's sole discretion, provided, however, that MrWalker's salary may not be adjusted downward without his consent. Pursuantto the agreement, Mr . Walker received, as of September 27, 1999, an option topurchase 500,000 shares of common stock at an exercise price equal to$12.00, which option will vest in four equal semiannual installments subjectto Mr Walker's continued employment with ShopNow.com After the firstyear of the agreement, ShopNow.com will grant Mr. Walker during each o f
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1the next eight quarters an option to purchase up to 125,000 shares of commonstock at an exercise price equal to the closing price of ShopNow corn'scommon stock on the Nasdaq National Market on the date of grant, whichoption will vest in four equal semiannual installments subject to Mr . Walker'scontinued employment with ShopNow corn. Mr. Walker receives a $400monthly car allowance and life insurance of $2,000,000 .
213. The preceding statements were materially false and misleading for the reasons state d
in paragraph 211 .
214. The Ubarter Registration Statement stated on page 89 in a section titled "Ce rtain
Shop Now.com Transactions"
In June 1999, ShopNow corn granted Mr. Walker . . options to purchase450,000 . . . shares of common stock . . at $10 00 per share .
ShopNow .com believes that al l these transactions were made on termsfavorable to ShopNow .com as it would have received from unaffiliated thirdpart ies
215 The preceding statements were materially false and misleading for the same reasons
stated in paragraph 21 1
216 The aforementioned omissions and false and misleading statements were material t o
plaintiffs for the reasons stated in paragraph 191 .
217. On June 1, 2000, the Network Commerce Defendants caused the Company to
announce in a press release that the acquisition of Ubarter corn had been completed, Network
Commerce paid $61 .7 million for Ubarter.com, issuing $40 .8 million in common stock, $875,000 in
cash, assuming $978,000 in debt, and canceling $7 6 million in debt between Ubarter .com and th e
Company
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SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONSOF SECTION 14(A) OF THE EXCHANGE ACT
Materially False and Misleading Statements inConnection with the April 19, 2000 Proxy Statement
218. On April 19, 2000, the Network Commerce Defendants issued a Proxy Statement
pursuant to Section 14(a) of the Exchange Act (the "Proxy Statement") .
219. The Proxy Statement was materially false and misleading because it omitted all fact s
relating to a so -called loan of $223,313 .60 to Walker evidenced by a promissory note dated
September 28, 1999 (the "September 1999 Undisclosed Payment") .
220 This so-called loan was not repaid by Walker when it came due in September 2000 o r
at any other time. No amendment to the terms of the note was ever disclosed. Walker was never
forced to forfeit any rights for failure to repay the so-called loan .
221 The Proxy Statement stated on page 10 in a section titled "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements"
ShopNow has entered into a written employment agreement with Mr. Walkereffective as of July 1, 1999 This agreement may be terminated by either MrWalker or ShopNow at any time, upon written notice to the other Theagreement provides for an initial annual salary of $400,000 and a yearly bonusof up to $200,000, based upon the achievement of performance criteriaspecified by the compensation committee . Mr. Walker's salary is to bereviewed at the end of each calendar year by the compensation committee andadjusted at the board's sole discretion, provided, however, that Mr . Walker'ssalary may not be adjusted downward without his consent . Pursuant to theagreement, Mr . Walker received, as of September 27, 1999, an option topurchase 500,000 shares of common stock at an exercise price equal to $12 .00per share, which option will vest in four equal semiannual installments subjectto Mr. Walker's continued employment with ShopNow After the first year ofthe agreement, ShopNow will grant Mr. Walker during each of the next eightquarters an option to purchase up to 125,000 shares of common stock at anexercise price equal to the closing price of ShopNow's common stock on theNasdaq National Market on the date of grant, which option will vest in fourequal semiannual installments subject to Mr. Walker's continued employmentwith ShopNow.
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 6 1
N \CL1EI rs12526911\(:omP i v'r AMENDED 111301 Doc
LAW OFFICES O F
KELLER ROHRBACK L .L.P.
1201 THIRD AVENUE, SUITE 320 0SEATTLE, WASHINGTON 98101-3052
TELEPHONE (209) 823-1900FACSIMILE ( 206) 823-3364
•222. The preceding statements were materially false and misleading because they failed t o
disclose that the Network Commerce Defendants planned to give Walker additional compensation in
the form of so-called loans that mirrored the September 1999 Undisclosed Payment Neither the
September 1999 Undisclosed Payment nor subsequent payments qualified as working capital or
served a general corporate purpose . The so-called loans were secured only by Walker's unvested
options in Company stock .
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223 The Proxy Statement stated on page 15 , in a section titled "Related Transactions with
Executive Officers, Directors and 5% Shareholders "
In June 1999, we granted Mr Walker . options to purchase 450,000 .shares of common stock . . . at an exercise price of $10 00 per share .
On August 11, 1999, we granted . options to purchase to purchase450,000 shares of common stock . . . at an exercise price of $10 .00 per share .
On September 27, 1999, we granted Mr. Walker options to purchase500,000 shares of common stock with an exercise price of $12 0 0
We believe that all these transactions were made on terms as favorableto us as we would have received from unaffiliated third partie s
224. The preceding statements were materially false and misleading because the Network
Commerce Defendants failed to disclose that the Company planned to pay additional Walker
compensation in the form of additional so-called loans that mirrored the September 1999
Undisclosed Payment. Neither the September 1999 Undisclosed Payment nor subsequent payment s
qualified as working capital or served a general corporate purpose . The so-called loans were secured
only by Walker's unvested options in Company stock . This was a related-party transaction that was
undertaken on terms far more favorable than one with an unaffiliated third party The Company's
disclosure of "Related Transactions with Executive Officers, Directors and 5% Shareholder's" was
therefore materially false and misleading .
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 6 2
N \CLIENTS125269111Comi LAiNTAty :r JED 111301-noC
LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE, WASHINGTON 98101-3052
TELEPHONE (206) 623-1900FACSIMILE (209) 623-3384
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225 The aforementioned omissions and false and misleading statements were material to
plaintiffs for the reasons stated in paragraph 19 1
ADDITIONAL SCIENTER ALLEGATIONS
226 As alleged herein, defendants Walker and Network Commerce acted with scienter i n
that they knew or with deliberate recklessness disregarded that the public documents and statements
issued or disseminated in the name of the Company were materially false and misleading, and knew
or with deliberate recklessness disregarded that such statements or documents would be issued or
disseminated to the investing publi c
227 Defendant Walker, by virtue of his personal knowledge, receipt of informatio n
reflecting the true facts regarding the Company, and/or his control over the Company, which made I
him privy to confidential proprietary information, participated in the fraudulent scheme alleged
herein With respect to non-forward-looking statements and/or omissions, the Network Commerce
Defendants knew and/or with deliberate recklessness disregarded the falsity and misleading nature of
the information, which they caused to be disseminated to the investing publi c
228 Defendant Walker had the opportunity to commit and participate in the wrongfu l
conduct complained of herein He is the senior executive officer of Network Commerce and,
accordingly, controlled the information disseminated to the investing public in Network Commerce's
press releases, SEC filings, and communications with analysts Thus, he could falsify and did falsify
the information that reached the public about Network Commerce's financial condition and results
of operation s
229 Defendant Walker engaged in such a scheme and course of conduct to inflate th e
price of Network Commerce common stock in order to, among other things, (i) profit from increases
in the Company's common stock price to obtain stock compensation awards, including insider sale s
at profits, and (ii) to issue more common stock to the investing public as currency for acquisitions
and to secure bank financing
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 63
N 1cL TS125269111CoMpLAon AM NDLD 111301 DOC
LAW OFFICES OF
KELLER ROHRBACK L.L.Y .
1201 THIRD AVENUE SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 206) 623-1900FACSIMILE (206) 623-3384
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7__~ -0230. The Network Commerce Defendants' scienter is evidenced also by the numerous
transactions in which Walker engaged to personally profit from their fraud The following chart sets
forth the so-called loans made and the insider sales of Network Commerce stock by Walker during
the Class Period:
WALKER'S UNDISCLOSED AND/OR UNLAWFUL PROFITS
Date Nature o fProfits Shares Sold Price per Share Amount
Reaped
Sep 28, 1999 So-Called Loan $223,313 .60
May 26, 2000 So-Called Loan 1,387,322 66
Jun 1, 2000 So-Called Loan 1,983,223 58
Aug . 3, 2000 Sale 120,000 6 00 720,000 00
Aug . 4, 2000 Sale 10,000 6 00 60,000 00
Aug . 6, 2000 Sale 50,000 5.50 275,000 0 0
Aug 15, 2000 Sale 70,000 5.44 380,800 00
Aug. 21, 2000 Sale 50,000 5.75 287,500.00
Aug. 28, 2000 Sale 50,000 5.25 262,500.00
Sep. 19, 2000 So-Called Loan N/A 556,140.16
Oct 25, 2000 So-Called Loan N/A 250,000 00
Nov 16, 2000 So-Called Loan N/A 100,000.00
Nov. 20, 2000 Sale 35,853 2.46 88,198 0 0
Nov 21, 2000 Sale 3,473 2 38 8,266 00
Nov. 21, 2000 Sale 5,000 2 .25 11,250 00
Nov 22, 2000 Sale 5,000 2 00 10,000 00
Nov. 22, 2000 Sale 85,000 1 .68 142,800.00
Feb 1, 2001 Sale 300,000 0.50 150,000 .00
Feb 7, 2001 Sale 25,000 0.38 9,500 00
Feb 9, 2001 Sale 100,000 031 31,000 00
TOTALS 909,326 $6,936,814.00
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 64
N \CL)Evrs125269111COMPL .A1 r AMENDED 111301 DDC
LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 206) 623 .1900FACSIMILE ( 206) 623-3384
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231 . Walker's proceeds during the Class Period from the above-listed activities wer e
$6,936,814, including approximately $4.5 million in " loans" and approximately $2.4 million in
insider sales of 909,326 shares
232 . The foregoing insider transactions are highly unusual because each one was made
either contemporaneously with or within a few days of materially false and misleading statements
made by the Network Commerce Defendants, as detailed above
The Executive Compensation Plan
233 . Defendant Walker beneficially owned substantial amounts of the Company's stock as
detailed above and thus benefited from increases in the Company's stock price. Defendant Walker
was awarded stock options for 950,175 shares for the fiscal year ended December 31, 1999
234. Pursuant to a July 1, 1999 written employment agreement, Walker was awarded stoc k
I options of 125,000 shares during each of the successive eight quarters commencing on July 1, 200 0
235. According to the April 19, 2000 proxy statement filed with the SEC on Schedule
14A, a significant port ion of the Walker 's compensation is equity based and is closely tied to the
economic performance of the Company
The compensation committee views stock options as an important part of ourlong-term, performance-based compensation program . The compensationcommittee bases grants of stock options to our executive officers under ourstock option plan on the committee's estimation of each executive'scontribution to the long-term growth and profitability of [NetworkCommerce]. The stock option plan is intended to provide additionalincentives to the executive officers to maximize shareholder value .
236. Defendant Walker received the following incentive compensation for fiscal year
1999
Name Cash Salary
Walker $321,923
Cash Bonus Options
$101,566 950,175
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 65
N \CLIENTs12526911\00MIPLAINT AMENDED 111301 .toc
LAW OFFICES OF
KELLER ROHRBACK L .L P .
1201 THIRD AVENUE, SUITE 3200SEATTLE, WASHINGTON 98101 .3052
TELEPHONE (208) 823 1900FACSIMILE (206) 823 3384
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237. Thus, Walker was highly motivated to inflate the price of the Company's common
stock because a significant portion of his compensation (both stock and cash) was derived from th e
price of such stock.
238 As detailed in paragraphs 98, 103, 127, 137, 138, 162 and 163, during the Clas s
Period the Network Commerce Defendants granted Walker so-called loans from the Company
treasury totaling $4 5 million . These "loans" were secured by Walker's Company stock or unvested
options for Company stock .
239. Thus, Walker was highly motivated to inflate the price of Network Commerc e
common stock to be able to sell his stock at a profit and to avoid being liable for insufficien t
collateral to cover the so-called loans .
240 Network Commerce funded its day-to-day operations and acquisitions largely through
(1) the issuance of stock in public offerings, (ii) borrowings under a $15 million credit agreement
with a commercial bank entered into on May 19, 2000 (the "Credit Agreement"), and (iii) a $2 0
million private placement with Capital Ventures International ("CVI") in convertible notes pursuant
to a Securities Purchase Agreement executed on September 28, 2000 (the "Securities Agreement") .
241 . Under the Credit Agreement, the Company was required to abide by certain financial
and nonfinancial covenants, including an adjusted quick ratio (de fined as the ratio of Consolidated
Quick Assets to Consolidated Current Liabilities) of 1 .75 to 1 .00, and a certain minimum
consolidated net worth The Credit Agreement also required the Company to prepare its quarterly
and annual financial statements during the Class Period in accordance with GAAP.
242 The Company's performance under the Credit Agreement was secured by
substantially all of the Company 's assets.
243 As of December 31, 2000 the Company had an adjusted quick ratio of 1 .14 to 1 00,
which was out of compliance with the Credit Agreement .
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 6 6
N \cLiENTs125269111ComK AINT AMENDED 111301 .Doc
LAW OFFICES OF
KELLER ROHRBACK L .L .P .
1201 THIRD AVENUE SUITE 3200SEATTLE, WASHINGTON 98101-3052
TELEPHONE ( 206) 6 2 3 .1900FACSIMILE (206) 623-3384
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244 The Company also sold $20 0 million of convertible notes and warrants to CVI. The
notes bad a one-year term. Pursuant to the sale, the Company filed a registration statement on Form
S-3 with the SEC . Upon closing of the Securities Purchase, the Company issued warrants to
purchase 4,050,633 shares of Network Commerce common stock to the private institution at an
exercise price of $10 37 per share. The warrants were immediately exercisable and expire five years
from closing Immediately after the effective date, $5 million of the notes were converted into
common stock .
245 On April 3, 2001, the Company received a notice of default from the holders of the
$20 million of convertible notes for an alleged violation of certain provisions of the convertible
notes relating to the breach of covenants in the Credit Agreement and the breach by the Company of
certain material terms of the Securities Agreement dated September 28, 2000 . The notice of default
demanded that the Company re deem the convertible notes on or before April 9, 2001 for an amount
equal to $17 25 million.
246 Thus, to quench the Company' s dire need for cash, the Network Commerc e
Defendants were highly motivated to inflate the price of Network Commerce stock to obtain the
Credit Agreement and Secondary Public Offering and to complete the private placemen t
FRAUD-ON-THE-MARKET ALLEGATIONS
247 With regard to the al legations arising under Section 10(b) and Rule 1Ob-5, plaintiffs
intend to rely on the fraud-on-the market doctrine, which assumes the existence of an efficient
market for Network Commerce securities . In that connection, brokers nationwide have immediate
access to press releases and trading information about Network Commerce through computer and
news wire systems . These systems display, within minutes of the information release or transaction
taking place, pertinent information and the most recent trades and price s
248. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-
I on-the-market doctrine in that-
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 67
N 1CLfNTs\25269111COMPLAn1T AMENDED 111341 Doc
LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE SUITE 3200SEATTLE, WASHINGTON 96 1 01-3052
TELEPHONE ( 20E) 623 .1900FACSIMILE {20B ) 623 3384
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(a) defendants made public misrepresentations and/or failed to disclose facts
during the Class Period ,
(b) the omissions and misrepresentations of fact were material ,
(c) Network Commerce met the requirements for listing and was listed on the
NASDAQ, an open, highly efficient, and automated market ;
(d) as a public company, Network Commerce filed periodic public reports with
the SEC;
(e) Network Commerce's trading volume, during the Class Period, was
substantial, thereby reflecting numerous trades each day ,
(f) the misrepresentations and/or omissions alleged herein would tend to induce a
reasonable investor to misjudge the value of Network Commerce's common stock ;
(g) plaintiffs and the members of the Class purchased their common stock during
the Class Period without knowledge of the omitted or misrepresented facts, an d
(h) Network Commerce was followed by various analysts employed by major
brokerage firms that wrote reports that were distributed to the sales force and certain customers o f
their respective brokerage firms and which were available to the public through various automated
data retrieval services . Thus, each of these reports was publicly available and entered the publi c
marketplace .
249. Based on the foregoing, plaintiffs and the members of the Class are entitled to a
presumption of reliance upon the integrity of the market for their Section 10(b) claims.
COUNT I
(Against Walker and Network Commercefor Violations of Section 10(b) of the Exchange Act
and Rule 10b-5 Promulgated Thereunder)
250. Plaintiffs repeat and re-allege the allegations contained above, as if fully set forth J
herein
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 6 8
N \CLIENr'5125269111CDNvL.ivT AMENDED 111301 .Doc
LAW OFFICES OF
KELLER ROHRBACK L .L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE (208) 623 1900FACSIMILE (206 ) 623 3384
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• •251 . This count is asserted against defendants Walker and Network Commerce and i s
based upon Section 10(b) of the Exchange Act, 15 U.S .C § 78j(b), and Rule 10b-5 promulgate d
I thereunder.
252 During the Class Period, defendants Walker and Network Commerce, singly and i n
concert, engaged in a common plan, scheme, and unlawful course of conduct, pursuant to which they
knowingly or with deliberate recklessness engaged in acts, transactions, practices, and courses of
business which operated as a fraud and deceit upon plaintiffs and the other members of the Class,
and made various deceptive and untrue statements of material facts and omitted to state material in
order to make the statements made, in light of the circumstances under which they were made, not
misleading to plaintiffs and the other members of the Class . The purpose and effect of said scheme,
plan, and unlawful course of conduct was, among other things, to induce plaintiffs and the other
members of the Class to purchase the Company's common stock during the Class Period at
artificially inflated price s
253 . During the Class Period, defendants Walker and Network Commerce, pursuant t o
said scheme, plan, and unlawful course of conduct, knowingly and recklessly issued, cause to be
issued, participated in the issuance of, the preparation and issuance of deceptive and materially false
and misleading statements to the investing public as particularized above.
254. As a result of the dissemination of the materially false and misleading statements se t
forth above, the market price of the Company's common stock was artificially inflated during the
Class Period. In ignorance of the materially false and misleading nature of the statements described
above and the deceptive and manipulative devices and contrivances employed by said defendants,
plaintiffs and the other members of the Class relied, to their detriment, on the integrity of the market
price of the stock in purchasing the Company's common stock Had plaintiffs and the other
members of the Class known the truth, they would not have purchased said shares or would not have
purchased them at the inflated prices that were paid
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 6 9
N 1CLfNTS12526911%COMPLAENT AMENDED 11 13 0 1 DOC
LAW OFFICES OF
KELLER ROHRRACK L.L .P .
1201 THIRD AVENUE SUITE 3200SEATTLE, WASHINGTON 98101-3052
TELEPHONE ( 206) 823 1900FACSIMILE (206) 623-3384
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• •255 Plaintiffs and the other members of the Class have suffered substantial damages as a
result of the wrongs herein alleged in an amount to be proved at trial.
256 By reason of the foregoing, defendants Network Commerce and Walker directl y
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they- (a)
employed devices, schemes, and artifices to defraud, (b) made untrue statements of material facts or
omitted to state material facts in order to make the statements made, in light of the circumstances
under which they were made, not misleading, or (c) engaged in acts, practices, and a course of
business which operated as a fraud and deceit upon plaintiffs and the other members of the Class in
connection with their purchases or acquisition of the Company's common stock during the Class
Period
COUNT II
(Against Walker for Violations of Section 15 of the Securities Act)
257. Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 52 and
160 through 225 above as though fully set forth herein This count is brought pursuant to Section 1 5
of the Securities Act, 15 U S C § 77o, on behalf of the Class against defendant Walker .
258 Throughout the Class Period, defendant Walker, by reason of has director an d
executive positions and as the owner, directly and/or indirectly, of shares of the Company's common
stock, had the power and authority to cause the Company to engage in the wrongful conduct
complained of herein . As a result, at the time of the wrongs alleged herein, defendant Walker was a
"controlling person" of the Company within the meaning of Section 15 of the Securities Act .
259. Defendant Walker issued, caused to be issued, and participated in the issuance of th e
materially false and misleading statements contained in, or the material facts omitted from, the IPO
Registration Statement, the IPO Prospectus , the SPO Registration Statement, the SPO Prospectus,
the Ubarter Prospectus , Registration Statement , the Proxy Statement and signed the same Pursuant
to Section 15(a) of the Securities Act, by reason of the fo regoing , defendants Walker is liable to the
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 0
N 1CLIENTS125269111CoMPLAmrr AMENDED 111301 .DOc
A&& -
LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE, WASHINGTON 98101-3052
TELEPFIONE (206 ) 623-1900FACSIMILE ( 206) 623 3384
0 0
I same extent as is Network Commerce for the Company's aforesaid violations of Sections 11 an d
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12(a)(2) of the Securities Act As a direct and proximate result of said defendant's wrongful conduct
during the Class Period, plaintiffs and the other members of the Class have suffered substantial
damages in connection with their acquisition of Network Commerce common stock
COUNT III
(Against Walker for Violation of Section 20(a) of the Exchange Act)
260. Plaintiffs repeats and real leges the allegations contained above, as if set forth full y
herein
261 . Defendant Walker, by virtue of his position, stock ownership and specific acts
described above, was at the time of the wrongs alleged herein, a controlling person within the
meaning of Section 20(a) of the Exchange Act.
262. Defendant Walker had the power and influence and exercised the same to cause th e
Company to engage in the illegal conduct and practices complained of herein .
263 By reason of the conduct alleged in Count I of the Complaint, defendant Walker is
liable for the aforesaid wrongful conduct and is liable to plaintiffs and to the other members of th e
Class for the substantial damages that they suffered in connection with their purchase or acquisition
of the Company's common stock during the Class Period.
COUNT IV
(Against Network Commerce, Walker , and the IPO Underwriter Defendantsfor Violations of Section 11 of the Securities Act )
264 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 19
through 52, and 160 through 181 above as though fully set forth herein
265 This cause of action is brought by plaintiffs pursuant to Section 11 of the Securities
Act, 15 U S .C § 77k, on behalf of the Class against defendants Network Commerce, Walker, and
the IPO Underwriter Defendants and does not sound in fraud
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 1
N %CLIENTS125269111COMPL.AINT AMENDED 111301 .DOC
LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE ( 206) 623-1900FACSIMILE (206) 623-3384
0 r
1 266 The June 18, 1999 Registration Statement for the Initial Public Offering, as amended
2 on July 30, 1999 , August 25, 1999, August 31, 1999, September 9, 1999, September 22, 1999, and
3 September 28, 1999 (the "IPO Registration Statement ") was inaccurate and misleading , contained
4 untrue statements of material facts, omitted to state other facts necessary to make the statements
5 made not misleading , and concealed and failed adequately to disclose mate rial facts as described
6 above
7 267. Network Commerce is the registrant for the shares sold to plaintiffs and other
8 members of the Class . Network Commerce issued, caused to be issued and part icipated in the
9 issuance of materially false and misleading wri tten statements to the investing public contained in
10 the IPO Registration Statement . As an issuer of the shares, Network Commerce is s trictly liable to
11 plaintiffs and the Class for the material misstatements or omissions .
12 268. Defendant Walker either personally or through an attorney- in-fact signed the IPO
13 Registration Statement and was a director and senior executive of Network Commerce at the time of
14 the IPO
15 269. Each of the IPO Underwriter Defendants was an underwriter of the Network
16 Commerce stock as that term is used in Section 11(a)(5) of the Securities Act
17 270 The defendants named herein were responsible for the contents and dissemination of
18 the IPO Registration Statement. None of the defend ants named herein made a reasonable
19 investigation or possessed reasonable grounds for be lieving that the statements contained in the IPO
20 Registration Statement were true and did not omit any material facts and were not materially
21 misleading
22 271. Plaintiffs and the members of the Class acquired shares of Network Commerce
23 pursuant to, or traceable to, the IPO Registration Statement and did not know of untrue statements or
24 omissions of material facts
25 272 Plaintiffs and the Class have sustained damages
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CONSOLIDATED AMENDED LAW OFFICES OF
CLASS ACTION COMPLAINT - 72 KELLER ROHRBACK L .L.P .1201 THIRD AVENUE , SUITE 3200
SEATTLE , WASHINGTON 98101-3052TELEPHONE ( 206) 623 190 0
N\CLrENTS125269111COMPL . TAMENDFD111301 .DOC FACSIMILE ( 208) 623-3384
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273 . The action is commenced within three years after Network Commerce stock was
bona fide offered to the public and the claims asserted herein were brought by plaintiffs within one
year after plaintiffs discovered or, by the exercise of reasonable diligence , should have discovered
the misrepresentations and omissions alleged herein The price of Network Commerce stock on the
date this action was filed was below the purchase price paid by plaintiffs and members of the Class .
COUNT V
(Against Network Commerce , Walker, and the IPO Underwriter Defendantsfor Violations of Section 12(a)(2) of the Securities Act )
274 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 1 9
through 52, and 160 through 181 above as though fully set forth herein .
275. This count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U S C.
§ 771, on behalf of the Class against Network Commerce, Walker and the IPO Underwriter
Defendants
276. The Company offered and issued a security, namely shares of Network Commerce
common stock, by means of a September 29, 1999 prospectus and October 15, 1999 Prospectu s
Supplement (the "IPO Prospectus") during the Class Period . The IPO Prospectus contained untrue
statements of material facts and omitted to state material facts required to be stated therein or
necessary to make the statements made in the IPO Prospectus not misleading, as set forth above .
277. The offering materials included untrue statements of material fact and omitted to stat e
material facts necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading, as set forth with greater particularity herein The Company's
actions of solicitation included participating in the preparation of the materially false and misleading
IPO Registration Statement and IPO Prospectus
278 The IPO Underwriter Defendants and other broker- dealers acting on their behalf sold
Network Commerce stock to plaintiff and the Class within the meaning of Section 12(a)(2) of th e
Securities Act. They did so by means of the materially false and misleading Registration Statement
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 3
N \cLrENTs125269111COAIPLAI:NT ANMNDED 111301 DOC
LAW OFFICES OF
KELLER RoHR13ACK L .L .P .
1201 THIRD AVENUE SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE {206) 623-1 900FACSIMILE (206) 923-3384
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I and Prospectus described above, which included untrue statements of material fact and omitted to
state material facts necessary in order to make the statements made, in light of the circumstance s
under which they were made, not misleading in violation of Section 12(a)(2) of the Securities Act
279. The IPO Underwriter Defendants are "sellers" within the meaning of the Securities
Act because the IPO Underwriter Defendants (a) transferred title to Network Commerce stock to the
members of the Class; (b) transferred title to Network Commerce stock to other underwriters and/or
broker-dealers that sold Network Commerce stock as agents for the IPO Underwriter Defendants ;
and (c) solicited the purchase of Network Commerce stock by the Class, motivated at least in part by
a desire to serve the IPO Underwriter Defendants' own financial interests, including but not limited
to commissions on their own sales of Network Commerce stock and separate commissions on the
sales of Network Commerce stock by non-underwriter broker-dealers.
280. Plaintiffs and the members of the Class did not know of any of the untruthfu l
I statements and omissions alleged and in the exercise of reasonable care could not have known of
them
281 This action is commenced within three years of the initial public offerings and withi n
one year of the time plaintiffs and the other Class member purchasers of the stock discovered or
could have discovered the existence of untrue statements by exercising due diligence .
282. Plaintiffs and the other Class members hereby tender their common stock to th e
defendants and seek rescission of their purchases to the extent that they continue to own suc h
securities .
COUNT VI
(Against Network Commerce, Walker, and the SPO Underwriter Defendantsfor Violations of Section 11 of the Securities Act)
283 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 1 9
through 52, and 182 through 201 above as though fully set forth herein .
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 4
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LAW OFFICES OF
KELLER ROHRBACK L .L.P .
1201 THIRD AVENUE, SUITE 3200SEATTLE, WASHINGTON 98101-3062
TELEPHONE (208) 823-1900FACSIMILE (206) 623 3384
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284. This cause of action is brought by pla intiffs pursuant to Section 11 of the Securities
Act, 15 U S.C § 77k, on behalf of the Class against Network Commerce , Walker, and the SP O
I Underwriter Defendants and does not sound in fraud .
285 The January 20, 2000 Registration Statement, as amended on January 31, 2000 an d
again on February 16, 2000 for the Secondary Public Offering (the "SPO Registration Statement")
was inaccurate and misleading, contained untrue statements of material facts, omitted to state othe r
facts necessary to make the statements made not misleading, and concealed and failed adequately to
disclose material facts as described above
286 Network Commerce is the registrant for the shares sold to plaintiffs and other
members of the Class. Network Commerce issued, caused to be issued and participated in the
issuance of materially false and misleading written statements to the investing public contained in
the SPO Registration Statement As an issuer of the shares, Network Commerce is strictly liable to
plaintiffs and the Class for the material misstatements or omissions
287. Defendant Walker personally signed the SPO Registration Statement and was a
director and senior executive of Network Commerce at the time of the SPO .
288. Each of the SPO Underwriter Defendants was an underwriter of the SPO as that ter m
is used in Section 11(a)(5) of the Securities Act
289. The defendants named herein were responsible for the contents and dissemination of
the SPO Registration Statement. None of the defendants named herein made a reasonabl e
investigation or possessed reasonable grounds for believing that the statements contained in the SP O
Registration Statement were true and did not omit any material facts and were not materially
misleading
290. Plaintiffs and the members of the Class acquired shares of Network Commerce
pursuant to, or traceable to, the SPO Registration Statement and did not know of untrue statement s
or omissions of material facts .
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 5
N \cuENTS\252691ACON 'LAiNT AMENDED 111301 DOC
LAW OFFICES OF
KELLER ROHRBACK L .L .P .
1201 THIRD AVENUE, SUITE 3200SEATTLE WASHINGTON 98101-3052
TELEPHONE (208) 623 .1900FACSIMILE (206) 623 .3384
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291 Plaintiffs and the Class have sustained damages
292 The action is commenced within three years after Network Commerce stock wa s
bona fide offered to the public and the claims asserted herein were brought by plaintiffs within on e
I year after plaintiffs discovered or, by the exercise of reasonable diligence , should have discovere d
the misrepresentations and omissions alleged herein The price of Network Commerce stock on the
date this action was filed was below the purchase price paid by plaintiffs and members of the Class .
COUNT VI I
(Against Network Commerce, Walker, and the SPO Underwriter Defendantsfor Violations of Section 12(a)(2) of the Securities Act)
293 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 1 9
through 52, and 182 through 201 above as though fully set forth herein .
294 This count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C.
§ 771, on behalf of the Class against defendants . Network Commerce, Walker and the SP O
Underwriter Defendants .
295 . The Company offered and issued a security, namely shares of Network Commerce
common stock, by means of a February 16, 2000 prospectus for a Secondary Public Offering (the
"SPO Prospectus") during the Class Period . The SPO Prospectus contained untrue statements o f
material facts and omitted to state material facts required to be stated therein or necessary to mak e
the statements made in the SPO Prospectus not misleading , as set forth above .
296. The offering materials included untrue statements of mate rial fact and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading, as set forth with greater particularity herein The Company's
actions of solicitation included participating in the preparation of the materially false and misleading
SPO Registration Statement and SPO Prospectus .
297. The SPO Underwriter Defendants and other broker-dealers acting on their behalf sol d
Network Commerce stock to plaintiff and the Class within the meaning of Section 12(a)(2) of th e
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 7 6
N \cLIENTs12 5 2 6 911 1COMPLAINT AMENDED 111301 Doc
LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHONE (20®) 623-1900FACSIMILE ( 206) 623-3364
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• •Securities Act. They did so by means of the materially false and misleading SPO Registration
Statement and Prospectus described above , which included untrue statements of material fact and
omitted to state material facts necessary in order to make the statements made , in light of the
circumstances under which they were made , not misleading in violation of Section 12(a)(2) of the
Securities Act .
298 The SPO Underwriter Defendants are "sellers" within the meaning of the Securities
Act because the SPO Underwriter Defendants (a) transferred title to Network Commerce stock to the
members of the Class ; (b) transferred title to Network Commerce stock to other underwriters and/or
broker-dealers that sold Network Commerce stock as agents for the SPO Underwriter Defendants ;
and (c) solicited the purchase of Network Commerce stock by the Class, motivated at least in part by
a desire to serve the SPO Underwriter Defendants' own financial interests, including but not limite d
to commissions on their own sales of Network Commerce stock and separate commissions on th e
sales of Network Commerce stock by non-underwriter broker-dealers
299 Plaintiffs and the members of the Class did not know of any of the untruthful
I statements and omissions alleged and in the exercise of reasonable care could not have known of
them .
300. This action is commenced within three years of the initial public offerings and within
one year of the time plaintiffs and the other Class member purchasers of the stock discovered or
could have discovered the existence of untrue statements by exercising due diligenc e
301 . Plaintiffs and the other Class members hereby tender their common stock to the
defendants and seek rescission of their purchases to the extent that they continue to own suc h
securities
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 77
N ICL1ENTs125269\1\ComPLA1NT AMENDED 111301 Doc
LAW OFFICES OF
KELLER ROHRBACK L.L.P .
1201 THIRD AVENUE SUITE 3200
SEATTLE WASHINGTON 98101-3052
TELEPHONE (206) 623-1900FACSIMILE (206) 823-3384
0 S
1 COUNT VIII
2 (Against Network Commerce and Walker for Violations ofSection 11 of the Securities Act)
3302 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 19
4through 52, and 202 through 217 above as though fully set forth herein .
5303 This cause of action is brought by plaintiffs pursuant to Section 11 of the Securities
6Act, 15 U.S C § 77k, on behalf of the Class against defendants Network Commerce and Walker and
7does not sound in fraud .
8304 The March 24, 2000 Registration Statement for the merger between Network
9Commerce and Ubarter (the "Ubarter Merger"), as amended on May 8, 2000 (the "Ubarter
10 Registration Statement") was inaccurate and misleading, contained untrue statements of material11
facts, omitted to state other facts necessary to make the statements made not misleading, and
12concealed and failed adequately to disclose material facts as described above .
13305. Network Commerce is the registrant for the shares sold to plaintiffs and other
14members of the Class Network Commerce issued, caused to be issued and participated in the
15issuance of materially materially false and misleading written statements to the investing public
16contained in the Ubarter Registration Statement As an issuer of the shares, Network Commerce is
17strictly liable to plaintiffs and the Class for the material misstatements or omissions
18306. Defendant Walker, either personally or through an attorney-m-fact signed the Ubarter
19Registration Statement and was a director and senior executive of Network Commerce at the time of
20the Ubarter Merger
21307. The defendants named herein were responsible for the contents and dissemination of
22the Ubarter Registration Statement None of the defendants named herein made a reasonable
23investigation or possessed reasonable grounds for believing that the statements contained in the
24Ubarter Registration Statement were true and did not omit any material facts and were not materially
25misleading .
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CONSOLIDATED AMENDED LAW OFFICES OF
CLASS ACTION COMPLAINT - 78 KELLER ROHRBACK L .L .P.1201 THIRD AVENUE, SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHONE (206) 623-190 0
N ICLIENT5\25269\1\COMPLAINT AMENDED 111301 DOC FACSIMILE (206)
0BJ 623-33114
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0 J308 . Plaintiffs and the members of the Class acquired shares of Network Commerce
pursuant to, or traceable to, the Ubarter Registration Statement and did not know of untrue
statements or omissions of material facts .
309. Plaintiffs and the Class have sustained damages
310 The action is commenced within three years after Network Commerce stock was
bona fide offered to the public and the claims asserted herein were brought by plaintiffs within one
year after plaintiffs discovered or, by the exercise of reasonable diligence, should have discovered
the misrepresentations and omissions alleged herein The price of Network Commerce stock on the
date this action was filed was below the purchase price paid by plaintiffs and members of the Class .
COUNT IX
(Against Network Commerce and Walker for Violations ofSection 14 (a) of the Exchange Act)
311 . Plaintiffs repeat and reallege only the allegations in paragraphs 17, 19 through 52,
and 218 through 225 above as though fully set forth herein.
312. This cause of action is brought by plaintiffs pursuant to Section 14(a) of the Exchange
Act, 15 U S C § 78n(a), and Rule 14a-9, 17 C .F R. § 240 14a-9, on behalf of the Class against
Network Commerce and Walker.
313 The April 19, 2000 Proxy Statement pursuant to Section 14(a) of the Exchange Act
(the "Proxy Statement"), was inaccurate and misleading, contained untrue statements of material
facts, omitted to state other facts necessary to make the statements made not misleading, and
concealed and failed adequately to disclose material facts as described above .
314 Network Commerce is the registrant for the shares sold to plaintiffs and other
members of the Class. Network Commerce issued, caused to be issued and participated in the
issuance of materially false and misleading written statements to the investing public contained i n
the Proxy Statement
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 79
N ICLIENTS125269\11COM1'I:AINT AMENDED 111301 .DOC
LAW OFFICES OF
KELLER ROHRBACK L .L .Y .
1241 THIRD AVENUE, SUITE 3240SEATTLE, WASHINGTON 98101-3052
TELEPHONE ( 208) 823 .1900FACSIMILE (206) 623-3384
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315 Defendant Walker either personally or through an attorney-m-fact signed the Prox y
Statement and was a director and senior executive of Network Commerce at the time the Proxy
Statement was issue d
316. The defendants named herein were responsible for the contents and dissem ination of
I the Proxy Statement . None of the defendants named herein made a reasonable investigation or
possessed reasonable grounds for believing that the statements contained in the Proxy Statement
were true and did not omit any material facts and were not materially misleadin g
317. Plaintiffs and the members of the Class acquired shares of Network Commerce
pursuant to, or traceable to, the Proxy Statement and did not know of untrue statements or omission s
of material facts .
318. Plaintiffs and the Class have sustained damages .
319 . The action is commenced within three years after Network Commerce stock wa s
bona fide offered to the public and the claims asserted he rein were brought by plaintiffs within one
year a fter plaintiffs discovered or, by the exercise of reasonable diligence, should have discovere d
the misrepresentations and omissions alleged herein. The price of Network Commerce stock on the
date this action was filed was below the purchase price paid by plaintiffs and members of the Clas s
PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on their own behalf and on behalf of the Class, pray for judgment
as folIows-
A Declaring this action to be a proper class action and certifying plaintiffs as clas s
I representative under Rule 23 of the Federal Rules of Civil Procedu re;
B Awarding compensatory damages in favor of plaintiffs and the other members of th e
Class against all defendants, jointly and severally, for the damages sustained as a result of th e
wrongdoings of defendants, together with interest thereon ,
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 80
N \CL!E.NTs125269\I \COMPLAINT AMENDED 111301 OC
LAW OFFICES OF
KELLER ROHRBACK L .L.P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE WASHINGTON 98101-3052TELEPHONE ( 206) 623 1900FACSIMILE (208)623-3384
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C Awarding plaintiffs the fees and expenses incurred in this action, including
reasonable allowance of fees for plaintiffs' attorneys and experts, an d
D Granting such other and further relief as the Court may deem just and prope r
JURY DEMAND
Plaintiffs demand a trial by jury of all issues so triable
RESPECTFULLY SUB MITTED thisf
day ofNovember, 200 1
KELLER ROHRBACK, L .L.P
By U; -,,-LLynn lncoln Sarko, WSBA No 16569Elizabeth A Leland, WSBA No 23433
1201 Third Avenue, Suite 3200Seattle, Washington 98101Tel (206) 623-1900Fax (206) 623-3384
LIAISON COUNSEL FOR PLA INTIFFSAND THE CLASS
Scott A KamberThomas J HamsonWESCHLER HARWOOD HALEBIAN & FEFFER LLP
488 Madison Avenue
New York, New York 10022Tel, (212) 935-7400Fax (212) 753-363 0
STULL STULL & BRODYJules Brody6 East 45th StreetNew York, New York 10017Tel (212) 687-7230Fax (212) 490-2022
CONSOLIDATED AMENDEDCLASS ACTION COMPLA INT - 8 1
N IcLIENTS125269111CQMpLA NT AMENDED 111301 DOC
LAW OFFICES OF
KELLER ROHRBACK L .L.P .
1201 THIRD AVENUE SUITE 3200SEATTLE WASHINGTON 96101-3D52
TELEPHONE ( 206) 623-1900FACSIMILE ( 206) 623-3364
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t •STULL STULL & BRODY
Michael Braun
Patrice Bishop10940 Wilshire Blvd, Suite 2300Los Angeles, Califorma 90024Tel (310) 209-246 8Fax (310) 209-208 7
CO-LEAD COUNSEL FOR PLA INTIFFSAND THE CLASS
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT - 82
N 1cLmNTS125269111CoMPLATNT AMENDED 111301 DOC
LAW OFFICES OF
KELLER ROHRBACK L.L .P .
1201 THIRD AVENUE, SUITE 3200
SEATTLE, WASHINGTON 98101 3052TELEPHONE (206 ) 623-190DFACSIMILE (206) 623-3384
r '
0 coyo,nrooe-W-0The Honorable Robert S Lasnik
FILED ENTEREDLODGED RECEIVE D
NOV 1 3 2001 K NAT SEATTLE
CLERK U S DISTRICT COURTWESTERN DIS NCr OF WASHINGTO N
BY DEPUTY
UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WASHINGTO N
IN RE NETWORK COMMERCE INC )SECURITIES LIGITATION )
THIS DOCUMENT RELATES TO- )
ALL ACTIONS )
No C01-0675
CERTIFICATE OF SERVIC E
The undersigned certifies under the penalty of perjury under the laws of the United
States and the State of Washington that on November 13th, 2001 , I caused to be served in the
manner noted below, a copy of the following document s
1 . Consolidated Class Action Complaint, and
2. this Certificate of Servic e
VIA MESSENGER :
Stellman KeehnelBrian BuckleyGRAY, CARY, WARE &FREIDENRICH, L.L.P .999 Third Avenue, Suite 4000Seattle , WA 98101
Karl Phillip BarthSteven W BermanHAGENS BERMAN LL P1301 Fiftb Avenue, Suite 2900Seattle, WA 9810 1
CERTIFICATE OF SERVICE - 1
N \CLIENTS125269%11CERTIFICATE OF SERVICE 091201 DOC ORIGINAL
•Murray T S . LewisSteven J TollCOHEN MILSTEIN HAUSFELD &TOLL, PLLC999 Third Avenue, Suite 3600Seattle, WA 98104-400 1
Peter Scott EhrlichmanTim J FilerFOSTER PEPPER AND SHEFELMAN1111 Third Avenue, Suite 3400Seattle, WA 98101-3299
VIA U.S. MAIL
Clifford Allen Cantor627 - 208th Avenue SoutheastSammamish , WA 98074-703 3
Bruce G . MurphyLaw Offices of Bruce G. Murphy265 Llwyds LaneVero Beach, FL 32963
Steven E . CauleyCAULEY, GELLER, BOWMAN &COATES, LLPP O Box 2543 8Little Rock, AR 72221-5438
Brian M FelgoiseLaw Offices of Brian M230 South Broad StreetSuite 404Philadelphia, PA 19102
•Lori G. FeldmanMILBERG WEISS BERSHADHYNES & LERACH1001 Fourth Avenue, Suite 3200Seattle, WA 98154
Marc A TopazSCHIFFRIN & BARROWAY3 Bala Plaza East, Suite 400Bala Cynwyd, PA 1900 4
Charles J PivenLaw Offices of Charles J . Pleven, P A .The World Trade Center401 East Pratt Street, Suite 2525Baltimore, MD 2120 2
Marc S. HenzelLaw Offices of Marc S Henzel210 West Washington SquareThird FloorPhiladelphia, PA 19106-3503
Jules BrodyFelgoise Aaron Brody
Tzivia Brod ySTULL, STULL & BRODY6 East 45th Street , 4th FloorNew York, NY 1001 7
Gregory M . NespoleWOLF HALDENSTEIN ADLERFREEMAN & HERZ, LL P270 Madison AvenueNew York , NY 1001 6
CERTIFICATE OF SERVICE - 2
William S . LerachHelen J HodgesStephanie SchroderMILBERG WEISS BERSHADHYNES & LERACH LL P600 West Broadway, Suite 1800San Diego, CA 92101-505 0
N \CLIENTS\25269\1\CERTuICATE OF SERVICE 091201 Doc
0
Scott A KamberThomas J HarrisonWECHSLER HARWOODHALEBIAN & FEFFER LLP488 Madison Avenue , 8th FloorNew York, NY 10022
Evan J SmithBRODSKY & SMIT H11 Bala Avenue, Suite 39Bala Cynwyd, PA 19004
Dated this 13th day of November, 2001, at Seattle ,
CERTIFICATE OF SERVICE - 3
0
Joseph H WeissWEISS & YOURMAN551 Fifth Avenue , Suite 1600New York, NY 10176
Michael D . BraunSTULL, STULL & BRODY10940 Wilshire BoulevardSuite 2300Los Angeles, CA 90024
N \CLIENT5125269\1\CERTIAICATE OF SERVICE 091201 DOC
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