Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 1 of 31
UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
ALAN GOLDBERG, On Behalf of Himself §and All Others Similarly Situated, §
§Plaintiff, §
§ Civil Action No.vs. §
§ CLASS ACTION SCOTT W. KLEIN, KATHERINE J.HARLESS, SAM UEL D. JONES, ANDREW §§COTICCHIO and FRANK P. GATTO, §
Defendants. §§§
COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS
NATURE OF THE ACTION
1. This is a securities fraud class action on behalf of all purchasers of Idearc, Inc.
(“Idearc” or the “Company”) securities between August 10, 2007 and March 31, 2009, inclusive (the
“Class Period”), against certain of Idearc’s officers and/or directors for violations of the Securities
Exchange Act of 1934 (the “1934 Act”).
JURISDICTION AND VENUE
2. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise
under §§10(b) and 20(a) of the 1934 Act and SEC Rule 10b-5.
3. Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false
and misleading statements were made in or issued from this District.
4. Idearc’s principal executive offices are located at 2200 West Airfield Drive, DFW
Airport, Dallas, TX 75261.
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PARTIES
5. Plaintiff Alan Goldberg purchased Idearc securities as set forth in the attached
certification and was damaged thereby.
6. Non-party Idearc, through its subsidiaries, provides yellow and white page directories
and related advertising products in the United States and the District of Columbia. Its products
include print yellow and white pages; Superpages.com , an online local search product; and
Superpages Mobile. Idearc is not named as a defendant herein because the Company filed for
protection under the U.S. bankruptcy laws on March 31, 2009.
7. Defendant Scott W. Klein (“Klein”) is Idearc’s Chief Executive Officer (“CEO”) and
has served the Company in this capacity since June 2, 2008. Defendant Klein may be served at 2200
West Airfield Drive, DFW Airport, Dallas, TX 75261.
8. Defendant Katherine J. Harless (“Harless”) was Idearc’s President and CEO from
2000 through February 16, 2008. Defendant Harless may be served at 2200 West Airfield Drive,
D FW Airport, Dallas, TX 75261.
9. Defendant Samuel D. Jones (“Jones”) is Idearc’s Executive Vice President, CFO and
Treasurer. Jones served in this capacity on an acting basis from November 27, 2007 to September
2008, and was formally named in this capacity on September 2, 2008. Defendant Jones may be
served at 2200 West Airfield Drive, DFW Airport, Dallas, TX 75261.
10. Defendant Andrew Coticchio (“Coticchio”) was Idearc’s Executive Vice President,
Chief Financial Officer (“CFO”) and Treasurer of the Company from 2003 through November 26,
2007. Defendant Coticchio may be served at 2200 West Airfield Drive, DFW Airport, Dallas, TX
75261.
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11. Defendant Frank P. Gatto (“Gatto”) is Idearc’s Executive Vice President of
Operations. Gatto also served as interim CEO from February 27, 2008 through June 1, 2008.
Defendant Gatto may be served at 2200 West Airfield Drive, DFW Airport, Dallas, TX 75261.
12. Defendants Klein, Harless, Jones, Coticchio and Gatto (the “Individual Defendants”),
because of their positions with the Company, possessed the power and authority to control the
contents of Idearc’s quarterly reports, press releases and presentations to securities analysts, money
and portfolio managers and institutional investors, i. e., the market. They were provided with copies
of the Company’s reports and press releases alleged herein to be misleading prior to or shortly after
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected. Because of their positions with the Company, and their access to material non-public
information available to them but not to the public, the Individual Defendants knew that the adverse
facts specified herein had not been disclosed to and were being concealed from the public and that
the positive representations being made were then materially false and misleading. The Individual
Defendants are liable for the false statements pleaded herein.
FRAUDULENT SCHEME AND COURSE OF BUSINESS
13. Defendants are liable for: (i) making false statements; or (ii) failing to disclose
adverse facts known to them about Idearc. Defendants’ fraudulent scheme and course of business
that operated as a fraud or deceit on purchasers of Idearc securities was a success, as it: (i) deceived
the investing public regarding Idearc’s prospects and business; (ii) artificially inflated the price of
Idearc’s securities; and (iii) caused plaintiff and other members of the Class to purchase Idearc
securities at inflated prices.
BACKGROUND
14. At year end 2006 and during 2007, the Company touted the fact that “stringent”
policies, process re-engineering and system improvements in its credit and collections between 2003
and 2006 caused bad debts to steadily decline as follows: 2003 – 8.1 %; 2004 – 6.6%; 2005 – 4.9%;
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2006 – 4.3%. While touting the Company’s purportedly “stringent” credit and collection policies,
however, the investment community was unaware that the Company had “relaxed” its credit policies
in order to increase the dollar amount of revenue reported to stockholders.
15. The Company, by selling to non-credit-worthy customers effectively reported tens of
millions of dollars of sales that it otherwise would not have reported while accumulating tens of
millions of dollars of uncol lecti ble receivables. The Company carried these uncol lecti ble receivables
on its books as though they were collectible until mid-2008, when the Company admitted to a
“relaxation of certain aspects of the Company’s credit policy” and began to write off these
uncol lecti ble receivables in a piecemeal fashion over several quarters.
16. During 2008, the Company wrote off $47 million of worthless receivables that it
attributed to its relaxation of credit policies in mid-2007. This incremental $47 million write-off of
receivables (an amount that was material to the Company’s reported $279 million pre-tax income for
2008) had a profound effect because (i) it represented the non-collection of $47 million of cash that
the investment community expected the Company to collect and (i i) it materially contributed to the
Company’s need to file for bankruptcy protection.
17. On March 8, 2007, the Company filed its Form 10-K for the year ended December
31, 2006 with the SEC (the “2006 Form 10-K”) which stated, in relevant part:
Billing and Credit Control Currently, we direct bill more than 80% of our customers.By the end of 2007, we anticipate migrating our remaining customers to our directbilling systems. We have a billing and collection agreement with V erizon. Under theagreement, Verizon bills and collects from our customers who have not yet migratedto our billing systems. These remaining customers, who are also V erizon localtelephone customers, consist primarily of smaller customers serviced by ourtelephone call center.
In 2003, in order to reduce our bad debt expense, we implemented a new credit andcollections program, which resulted in more stringent policies, process reengi neeri ngand system improvements. By the end of 2004, some aspects of the program wereimplemented. These initial efforts helped reduce our bad debt expense as a percent oftotal operating revenue from 8.1 % in 2003 to 6.6% in 2004. During 2005, wecontinued to implement additional new processes, which further reduced our bad
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debt expense as a percent of total operating revenue to 4.9% in 2005. In 2006, theseenhancements were fully implemented and our bad debt expense as a percent of totaloperating revenue was 4.3%.
Because most directories are published on 12-month cycles, we bill most of ourcustomers, many of which are small or medium-sized businesses, over the course ofthat 12-month period. Fees for national advertisers are typically billed upon issue ofeach directory in which advertising is placed by CM Rs, after deduction ofcommissions. Because we do not usually enter into contracts with our nationaladvertisers, we are subject to the credit risk of CM Rs on sales to those advertisers, tothe extent we do not receive fees in advance.
We manage collection of accounts receivable by conducting initial credit checks ofnew customers (under certain circumstances) and, where appropriate, requiringpersonal guarantees from business owners. We check all new orders from existingcustomers for payments that are past due to us prior to publishing the new order.
When applicable, based on our credit policy, we use both internal and external datato decide whether to sell to a prospective customer. In some cases, whereappropriate, we may also require the customer to prepay part or all of the amount ofits order.
Beyond efforts under certain circumstances to assess credit risk, we employ well-developed collection strategies using an integrated system of internal, external andautomated means to engage with customers concerning payment obligations.
18. On May 11, 2007, the Company filed its Form 10-Q for the quarterly period ended
March 31, 2007 with the SEC (the “March 31, 2007 Form 10-Q”). This document, which was
signed by Defendants Harless and Coticchio, incorporated the above specified representations
regarding the Company’s “Billing and Credit Control” that appeared in the 2006 Form 10-K by
reference by stating: “These interim financial statements do not contain all information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States, and should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2006.”
19. The M arch 31, 2007 Form 10-Q reported continued improvement in the Company’s
bad debts as a result of the Company’s “stringent” policies, process re-engineering and
credit/collection system improvements stating that “[b]ad debt expense as a percentage of revenue
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DEFENDANT/’ FA1/E AND MISLEADING STATEMENTS ISSUEDDURING THE CLASS PERIOD
20. On August 10, 2007, the beginning of the Class Period, the Company filed its Form
10-Q for the quarterly period ended June 30, 2007, with the SEC (the “June 30, 2007 Form 10-Q”).
This document, which was signed by Defendants Harless and Coticchio, incorporated the above
specified representations regarding the Company’s “Billing and Credit Control” 2006 that appeared
in the 2006 Form 10-K by reference by stating: “These interim financial statements do not contain
all information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States, and should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006.”
21. The June 30, 2007 Form 10-Q strongly inferred that the Company’s stewardship over
its credit function had kept the level of bad debts to the 4% figure which was reported at M arch 31,
2007, stating that “[b]ad debt expense as a percentage of revenue was 4.0% and 4.5% for the six
months ended June 30, 2007 and 2006, respectively.”
22. M oreover, the June 30, 2007 Form 10-Q reported a favorable change in bad debts in
terms of dollars written off, stating: “Bad debt expense of $32 million for the three months ended
June 30, 2007 decreased by $4 million, or 11.1 %, compared to $36 million for the three months
ended June 30, 2006 . . . . Bad debt expense of $64 million for the six months ended June 30, 2007
decreased by $8 million, or 11.1 %, compared to $72 million for the six months ended June 30,
2006.”
23. The June 30, 2007 Form 10-Q contained certifications signed by defendants Harless
and Coticchio which stated in relevant part:
(a) “Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statements made,in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report.”
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(b) I have “[e]valuated the effectiveness of the registrant’s disclosure controls andprocedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures as of the end of the period covered by this reportbased on such evaluation.”
24. Unbeknownst to the investing public, the June 30, 2007 Form 10-Q was materially
false and misleading because it failed to disclose that the Company had relaxed its credit policy in
order to enable the Company to report increased revenue, and that it would take a year or longer for
the extent of the adverse consequences of this action to become known. Disclosure of this critical
change in credit policy was required by SEC regulations, and the June 30, 2007 Form 10-Q failed to
contain the required disclosure and/or failed to disclose material facts necessary to make the
statements made in the June 30, 2007 Form 10-Q, in light of the circumstances under which such
statements were made, not misleading.
25. On November 11, 2007, the Company filed its Form 10-Q for the quarterly period
ended September 30, 2007, with the SEC (the “September 30, 2007 Form 10-Q”). This document,
signed by defendants Harless and Coticchio, incorporated the above specified representations
regarding the Company’s “Billing and Credit Control” that appeared in the 2006 Form 10-K by
reference by stating: “These interim financial statements do not contain all information and footnote
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States, and should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2006.”
26. The September 30, 2007 Form 10-Q stated the following concerning the Company’s
receivables:
Our primary source of funds continues to be cash generated from operations. Netcash provided by operating activities of $334 million for the nine months endedSeptember 30, 2007 decreased $460 million, compared to $794 million for the ninemonths ended September 30, 2006, primarily due to interest payments on debtincurred and separation costs associated with our spin-off from our former parent andan anticipated one-time increase in accounts receivable resulting from our decision toshift billing from Verizon to our own direct billing platform. In the past, amounts
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billed and collected by V erizon were received well in advance of normal customerpayment experience. Now that we are direct billing all customers, the new higheraccount receivable balance represents actual customer collection experience. Theseunfavorable items are partially offset by lower income tax payments and otherworking capital items.
27. Discussing bad debts, the September 30, 2007 Form 10-Q stated that “[b]ad debt
expense as a percentage of revenue was 4.6% and 4.2% for the nine months ended September 30,
2007 and 2006, respectively.” However, the September 30, 2007 Form 10-Q failed to disclose the
relaxation of the credit policies that were effected in order to enable the Company to report increased
revenue, or the imminent adverse consequences (decreased future earnings and liquidity) thereof.
Accordingly, the September 30, 2007 Form 10-Q was materially false and misleading.
28. The September 30, 2007 Form 10-Q contained certifications signed by defendants
Harless and Coticchio, which were substantially identical to the certifications that appeared in the
June 30, 2007 Form 10-Q. The September 30, 2007 certifications were materially false and
misleading because the September 30, 2007 Form 10-Q failed to disclose material facts necessary to
make the statements made in the September 30, 2007 Form 10-Q, in light of the circumstances under
which such statements were made, not misleading.
29. In addition, as described above, unbeknownst to plaintiff and the Class, the MD&A
contained within the Company’s September 30, 2007 Form 10-Q failed to comply with the MD &A
requirements because it failed to disclose the change in the Company’s credit policies that were
effected in order to enable the Company to report additional revenue, and the resultant adverse future
ramifications (decreased future earnings and liquidity) thereof.
30. On November 27, 2007, the Company announced it named defendant Jones as acting
chief financial officer and treasurer, replacing defendant Coti cchi o.
31. On February 7, 2008, the Company announced its results for the fourth quarter and
year ended December 31, 2007. As explained by The Dallas Morning News,
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Disappointing fourth-quarter sales and a weak 2008 outlook sent shares of yellowpages publisher Idearc Inc. down 24 percent Thursday.
Shares of the Grapevine-based company fell $3.66 to $11.56.
The company's fourth-quarter earnings of 68 cents a share actually beat consensusestimates by 4 cents, but the $787 million revenue fell $4 million short ofexpectations.
During a conference call Thursday morning, company executives predicted that“cyclical economic headwinds” would hinder 2008 revenue.
Company officials could not be reached for comment about the stock's fall. Analystsblamed declining print sales and the prospect of declining margins.
“The decline in print sales seems to be accelerating,” said Jeffrey Shelton, an analystat Natexis Bleichroeder in New York. “And the margins aren't as good online.”
Idearc, a Verizon Corp. spinoff that publishes yellow pages and related products,made $100 million, or 68 cents a share, on revenue of $787 million during the threemonths ended Dec. 31. For the same period in 2006, it made $107 million, or 73cents a share, on revenue of $801 million.
In describing the results during the earnings call, company officials mentionedseveral areas for improvement but otherwise expressed satisfaction.
“Our 2007 performance was in line with our expectations,” said CEO Kathy H arless,who noted that fourth-quarter profit was actually up when spinoff costs and othernonrepeati ng expenses are excluded.
By those measurements, profit rose to 75 cents a share.
The company boosted online revenue by 19 percent from the fourth quarter of 2006,not enough to offset print revenue losses, but a good sign for management's Internettransition strategy.
The sagging economy will probably hurt performance, but executives say Idearc iswell positioned for the long run. The firm has been aggressively expanding both thenumber and the power of its online properties.
For example, Idearc has recently let advertisers add video to their online profiles.
32. On February 11, 2008, Standard & Poor’s Ratings Services lowered Idearc’s outlook
to negative from stable due to economic worries.
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33. On February 19, 2008, Idearc announced the appointment of its Chairman, John J.
Mueller, to the additional role of CEO. Effective immediately, Mr. Mueller replaced defendant
Harless.
34. On February 27, 2008, Mr. Mueller resigned as Chairman and CEO for unforeseen
health reasons. The Company appointed defendant Gatto as interim CEO.
35. On February 29, 2008, the Company filed its Form 10-K for the year ended
December 31, 2007 with the SEC (the “2007 Form 10-K”). The 2007 Form 10-K was signed by
defendants Gatto, Jones and Harless and disclosed an increase in bad debts which the Company
attributed to the “economic downturn [ . . . ] we are currently experiencing”:
As of December 31, 2007, approximately 83.9% of our print directory advertisingrevenues were derived from selling advertising to local businesses, which aregenerally small-and medium-sized businesses. In the ordinary course of our directoryoperations, we bill most of these customers over the course of a 12-month period.Full collection of delinquent accounts can take many months or may never occur. For2007, bad debt expense represented approximately 5.0% of our net revenue, anincrease from 4.3% in 2006. Small and medium-sized businesses tend to have fewerfinancial resources and higher rates of failure than larger businesses, in particularduring periods of economic downturn, such as we are currently experiencing. Thesefactors increase our exposure to delinquent accounts by our customers.
36. The 2007 Form 10-K failed to disclose the relaxation of the credit policies that were
affected in order to enable the Company to report increased revenue, or the imminent adverse
consequences (decreased current and future earnings and liquidity) thereof. Accordingly, the 2007
Form 10-K was materially false and misleading.
37. The 2007 Form 10-K contained certifications signed by defendants Gatto and Jones
which were substantially identical to the certifications that appeared in the June 30, 2007 Form 10-Q.
These certifications were materially false and misleading because, as specified above, the 2007 Form
10-K failed to disclose material facts necessary to make the statements made in the 2007 Form 10-K,
in light of the circumstances under which such statements were made, not misleading.
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38. In addition, as described above, unbeknownst to plaintiff and the Class, the MD&A
contained within the Company’s 2007 Form 10-K failed to comply with the above specified MD&A
requirements because it failed to disclose the change in the Company’s credit policies that were
effected in order to enable the Company to report additional revenue, and the resultant adverse future
ramifications (decreased current and future earnings and liquidity) thereof.
39. On March 27, 2008, defendant Jones informed investors that Idearc’s underlying
business fundamentals were sound:
Idearc I nc.'s acting chief financial officer, Samuel " Dee" Jones, presenting at theCredit Suisse 2008 Global Leveraged Finance Conference in Scottsdale, Az., toldinvestors that the Company's underlying fundamentals and long-term prospects areunchanged.
" The set of assets that made this business an attractive investment are still there,still sound and still solid," Mr. Jones said.
The acting CFO also gave the audience additional detail around Idearc's revenueguidance that was provided earlier in the year. "Our view of 2008 is such that weanticipate mid-single digit percentage point declines in multi-product amortizedrevenue. And, as previously communicated, we anticipate some operating margincontraction due to the mix shift in revenues."
Mr. Jones made it clear that he does not foresee any near-term liquidity issues forthe Company. Regarding capital allocation, Mr. Jones told investors that the IdearcBoard of Directors has decided to eliminate payment of dividends as part of thecurrent capital allocation program and focus on improving the Company's riskprofile.
"This approach allows us to maximize flexibility as we work our way through a morechallenging economic environment," Mr. Jones explained. "While the Boardcertainly has the discretion to resume paying dividends in the future, it is keenlyfocused on an appropriate capital allocation program and risk profile for theenterprise. In light of current market conditions, we firmly believe this is the mostfinancially prudent approach to capital allocation."
M r. Jones also told conference attendees that local media, and directional media inparticular, continues to be a large and growing market. He said the Company has anumber of initiatives in place to help mitigate the impact from current cyclicaleconomic headwinds and the objective is to protect Idearc's customer base.
"We are managing our print business with opportunities to improve performance aswe move through 2008. We are confident the multi -platform strategy will bring
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long-term value to stockholders, sales leads to advertisers and relevant local resultsto consumers," he concluded.
40. On March 28, 2009, the Associated Press ran a story titled “Idearc shares down after
dividend cut,” which stated in relevant part:
Shares of I dearc Inc. fell Friday after the yellow page publisher said it will eliminatedividend payments and an analyst forecast lower revenue.
The stock fell 70 cents, or 15.4 percent, to $3.86.
Goldman Sachs analyst Peter M. Salkowski said that while the dividend cutannounced earlier this week is important, the biggest news is the challengingenvironment in which the Dallas-based company operates.
Print ad sales will likely dip 9 percent to 10 percent this year, and the company maychoose to build cash reserves despite that fact that debt repayment is a high priority,he said.
Sal kowski cut his 2008 earnings outlook to $2.63 per share from $2.75 per share,previously. Analysts polled by Thomson Financial expect, on average, higherearnings of $2.67 per share.
Sal kowski rates shares "Neutral" and has a $4 price target.
41. On May 6, 2008, the Company issued a press release announcing its financial results
for the three months ended March 31, 2008, which quoted defendant Gatto as stating: “The
economic softness that began in the latter half of 2007 continues to impact our results and, while the
first quarter proved to be challenging, we remain committed to our multi -product strategy, which we
believe will ultimately maximize value to our investors.”
42. The Company’s earnings and defendant Gatto’s statements had a positive effect on
the market. As reported by the Associated Press:
Yellow page publisher I dearc I nc. said Tuesday its first-quarter earnings rose 8percent to beat Wall Street forecasts, as the company reduced expenses to counter adrop in print products revenue.
I dearc shares surged 63 cents, or 18.6 percent, to $3.96 in morning trading. The stockhas dropped from a 52-week high of $38 last August to reach a low of $3.11 on April30.
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43. By the end of the day, the Company's shares had jumped $1.52, or 45.7%, to close at
$4.85 per share.
44. Defendant Gatto’s remarks were materially false and misleading because defendant
Gatto failed to disclose the change in the Company’s credit policies that were effected in order to
enable the Company to report additional revenue, and the resultant adverse ramifications (decreased
earnings and liquidity) that the change in the Company’s credit policies had on the Company’s
reported earnings for the three months ended M arch 31, 2008, and would continue to have on
subsequent periods.
45. On May 8, 2008, the Company filed its Form 10-Q for the quarterly period ended
March 31, 2008, with the SEC (the “March 31, 2008 Form 10-Q”). This document, which was
signed by defendants Gatto and Jones, incorporated the above specified representations regarding the
Company’s bad debts that appeared in the 2007 Form 10-K by reference by stating:
“These interim financial statements do not contain all information and footnotedisclosures normally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States, and should be read inconjunction with our Annual Report on Form 10-K for the year ended December 31,2007.”
46. The M arch 31, 2008 Form 10-Q disclosed a sharp increase – $7 million, or almost
22% – in bad debts, without disclosing the fact that the sharp increase was due to the relaxation of
the credit policies that were effected in order to enable the Company to report increased revenue, and
without disclosing the resultant current and future adverse consequences (decreased earnings and
liquidity) of the relaxed credit policies. Accordingly, the M arch 31, 2008 Form 10-Q was materially
false and misleading.
47. The March 31, 2008 Form 10-Q Form 10-Q contained certifications signed by
defendants Gatto and Jones, which were substantially identical to the above discussed certifications
that appeared in the June 30, 2007 Form 10-Q. These certifications were materially false and
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misleading because, as specified above, the M arch 31, 2008 Form 10-Q failed to disclose material
facts necessary to make the statements made in the M arch 31, 2008 Form 10-Q, in light of the
circumstances under which such statements were made, not misleading.
48. In addition, as described above, unbeknownst to plaintiff and the Class, the M D&A
contained within the Company’s March 31, 2008 Form 10-Q failed to comply with the above
specified M D&A requirements because it failed to disclose the change in the Company’s credit
policies that were effected in order to enable the Company to report additional revenue, and the
resultant adverse future ramifications (decreased earnings and liquidity) thereof.
49. On June 2, 2008, the Company announced the appointment of defendant Klein as
CEO. Defendant Gatto, who had served as interim CEO since February 27, 2008, resumed his
position as Executive Vice President – Operations.
50. On July 29, 2008, the Company issued a press release announcing its financial results
for the three months and six months ended June 30, 2008. The Company reported net income of $76
million for the second quarter 2008, a decrease of 30.3% versus the same period in 2007, and the
Company reported a six month net income of $187 million, an 11.8% decrease compared to the same
period in 2007.
51. On July 29, 2008, the Company also held a conference call during which the
following dialogue took place:
Unidentified Analyst: Hi, I want to make sure I had a better understanding of theincrease in expenses in the quarter on the G&A line. Is it ... the increase in 20 ... ofabout 21 million or so for the quarter, is that almost exclusively bad debt related? Isthat what you were saying before Dee?
Dee Jones ---- Acting Chief Financial Officer, Senior Vice President InvestorRelations: Yes, as I said, the vast majority of it is the increase in the bad debtprovision along with some collection costs and outside collection agency fees that wealso incurred in showing up our crediting and collection activities. There was alsosome srnall amount of timing around the couple of items that we did incur in thesecond quarter but the vast majority of it was the bad debt.
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Unidentified Analyst: Okay. On the margins, great. And this rather dramatic increasein bad debt from a year ago, obviously there . . . the economy is not great out there.But is this partially your credit practices or are there many customers that were baddebt and how you’re going to be able to grow your revenue if that many customersthat are not paying, I guess, is sort of the other concern?
Scott Klein, Chief Executive Officer: Yes Bob, it’s Scott. Quite simply, our creditpractices a year ago were not what they should have been. The credit policy was notas tight as it needed to be.
And as is the nature of our business, it will take some time for some of thosemistakes that were made to work their way through the system. But rest assured ourcredit policy is appropriate today and is as tight as it should be. And our credit andcollections team is all over this having put in place some very new and creative waysto perhaps collect money that much more quickly.
Unidentified Analyst: So do you perceive bad debt remaining in that 6% range forthe balance of the year? Or is it . . . or should we start to see those improvementsalready in the second half of the year?
Dee Jones -- Acting Chief Financial Officer, Senior Vice President Investor Relations:Yes, as you know with bad debt and that aspect of things, it does take time to impactthings. I think the year-to-date rate at 5.7 will continue to assess and watch ourwriteoff rates with respect to that. As I did mention, the second quarter did see a step-up in the write-off rates but in that range of the 5.7, 6.26 is what we’re kind oflooking at. We’ll continue to assess as we look through the remainder of the year.
52. The disclosure of the Company’s credit policy “mistakes” and their adverse impact on
the Company’s second quarter earnings as well as their anticipated adverse impact on subsequent
quarters had a immediate and decisive effect on the price of the Company’s stock. The price
dropped 40% with an unprecedented volume of 23,659,000 shares traded.
53. The Dallas Morning News reported that “Idearc Revenue misses mark; value
plummets 40%:”
Disappointing second-quarter earnings sent shares of Idearc Inc. tumbling Tuesday.
The Grapevine-based publisher of Yellow Pages lost 40 percent of its value soonafter announcing that second-quarter profit fell 30 percent to $76 million or 52 centsa share,
Those earnings were well short of the 68 cents per share predicted, on average, byanalysts surveyed by Thomson Reuters.
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Operating revenue of $759 million was $5.4 million below expectations and $46million less than the revenue from last year's second quarter.
The 6.6 percent decline in Idearc's print revenue more than offset the 2.7 percentincrease in its Internet revenue.
The 2-year-old V erizon spinoff saw its stock fall 88 cents to $1.32.
"It is clear that we have not made the leap from operating as a division of Verizon tobeing a stand-alone public company. You will see us catch up quickly," said chiefexecutive Scott Klein.
54. On August 11, 2008, the Company filed its Form 10-Q for the quarterly period ended
June 30, 2008 with the SEC (the “June 30, 2008 Form 10-Q”). It reported:
Bad debt expense of $48 million for the three months ended June 30, 2008, increasedby $16 million, or 50.0%, compared to $32 million for the three months ended June30, 2007. The increased bad debt expense was influenced by the current weakeconomic environment, as well as a temporary relaxation of certain aspects of theCompany’s credit policy in mid-2007 associated with the transition of billingactivities from Verizon. Bad debt expense as a percent of total operating revenue was6.3% for the three months ended June 30, 2008 compared to 4.0% for the threemonths ended June 30, 2007.
Bad debt expense of $87 million for the six months ended June 30, 2008, increasedby $23 million, or 35.9%, compared to $64 million for the six months ended June 30,2007. The increased bad debt expense was influenced by the current weak economicenvironment, as well as a temporary relaxation of certain aspects of the Company’scredit policy in mid-2007 associated with the transition of billing activities fromVerizon. Bad debt expense as a percent of total operating revenue was 5.7% for thesix months ended June 30, 2008 compared to 4.0% for the six months ended June 30,2007.
55. The June 30, 2008 Form 10-Q Form 10-Q contained certifications signed by
defendants Klein and Jones, which were substantially identical to the above discussed certifications
that appeared in the June 30, 2007 Form 10-Q. These certifications were materially false and
misleading because, as specified above, the June 30, 2008 Form 10-Q failed to disclose material
facts necessary to make the statements made in the June 30, 2008, in light of the circumstances under
which such statements were made, not misleading.
56. In addition, as described above, unbeknownst to plaintiff and the Class, the MD&A
contained within the Company’s June 30, 2008 Form 10-Q failed to comply with the above specified
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MD&A requirements because it failed to disclose that the change in the Company’s credit policies
that were effected in order to enable the Company to report additional revenue had had, and would
continue to have, a material impact on subsequent quarters’ liquidity.
57. On October 30, 2008, the Company held a conference call during which the following
dialogue took place:
Jones: Yeah, as I said when I was going through the early part of the call, we arefeeling more pressure on the margins side relative to the bad debt issue and the baddebt activities that we are seeing. As I noted the provision rate for the third quarterwas about 8.2% for bad debt, the year-to-date level is at 6.5. And so we are seeingadditional pressure on margins as we look at through the remainder of the year,associated with that activity.
Andrew Finkelstein: Okay. And do you think that the 8.8% plus charge-off rate isgoing higher, as you look at in your fourth quarter and can you talk about paymentcollections activity there?
Jones: Well I would say that you know, the 8.2% in the third quarter, we haven’tseen significant change as yet, it’s a little early to tell with respect to the fourthquarter and what the economics are that we end up dealing with. So we are feelingmore pressure there. It’s just a little bit too early to tell exactly where it’s going tohead in the fourth quarter.
58. The disclosure of the Company’s run-away bad debts and the ominous admission by
management that they could not tell “where it’s going to head” had an immediate and decisive effect
on the price of the Company’s stock which dropped 36% in heavy trading.
59. Although certain partial disclosures were made, defendants knew or recklessly failed
to know and failed to disclose that bad debts for the year would approximate 7% and that the adverse
ramifications of the non-collection of tens of millions of dollars of receivables had had and would
continue to have, a materially adverse impact on the Company’s liquidity.
60. On November 6, 2008, the Company filed its Form 10-Q for the quarterly period
ended September 30, 2008 with the SEC (the “September 30, 2008 Form 10-Q”). It reported:
Bad debt expense of $60 million for the three months ended September 30, 2008,increased by $13 million, or 27.7%, compared to $47 million for the three monthsended September 30, 2007. The increased bad debt expense was influenced by the
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current weak economic environment, as well as the continuing effect of a temporaryrelaxation of certain aspects of our credit policy in mid-2007 associated with thetransition of billing activities from Verizon. Bad debt expense as a percent of totaloperating revenue was 8.2% for the three months ended September 30, 2008compared to 5.9% for the three months ended September 30, 2007. Our bad debt hasincreased over the past several quarters, both in dollar amount and as a percentage ofrevenue.
Given the current economic environment, our bad debt could continue to increase.
Bad debt expense of $147 million for the nine months ended September 30, 2008,increased by $36 million, or 32.4%, compared to $111 million for the nine monthsended September 30, 2007. The increased bad debt expense was influenced by thecurrent weak economic environment, as well as a temporary relaxation of certainaspects of our credit policy in mid-2007 associated with the transition of billingactivities from Verizon.
Bad debt expense as a percent of total operating revenue was 6.5% for the ninemonths ended September 30, 2008 compared to 4.6% for the nine months endedSeptember 30, 2007. Our bad debt has increased over the past several quarters, bothin dollar amount and as a percentage of revenue. Given the current economicenvironment, our bad debt could continue to increase.
61. The September 30, 2008 Form 10-Q Form 10-Q contained certifications signed by
defendants Klein and Jones, which were substantially identical to the above discussed certifications
that appeared in the June 30, 2007 Form 10-Q. These certifications were materially false and
misleading because, as specified above, the September 30, 2008 Form 10-Q failed to disclose
material facts necessary to make the statements made in the September 30, 2008 Form 10-Q, in light
of the circumstances under which such statements were made, not misleading.
62. In addition, as described above, unbeknownst to plaintiff and the Class, the M D&A
contained within the Company’s September 30, 2008 Form 10-K failed to comply with the above
specified M D &A requirements because it failed to disclose that the change in the Company’s credit
policies that were effected in order to enable the Company to report additional revenue had had, and
would continue to have, a material impact on subsequent quarters’ liquidity.
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63. On November 21, 2008, the Company announced that its stock was trading over the
counter under the trading symbol of I DA R and stopped trading on the New York Stock Exchange
(NYSE) at market close on Nov. 20.
64. On March 12, 2009, the Company announced 2008 results in a press release stating
that the Company “Remains Focused on Strengthening Business and Balance Sheet.” The press
release continued, in relevant part:
" Idearc's fourth quarter financial results are disappointing as we expected," said ScottW. Klein, chief executive officer of Idearc Inc. "We are making progress on ourtransformational and cost-cutting initiatives. However, the unprecedented economicchallenges this nation is facing are creating never-before-seen obstacles for ourclients and, as a result, for us as well."
* * *
Update on Liquidity and Capital Structure
As of December 31, 2008, Idearc had cash and cash equivalents of $510 million. Aspreviously reported, in October 2008, the Company borrowed $247 million under itsexisting $250 million revolving credit facility.
At December 31, 2008, the Company was in compliance with its quarterly leverageratio covenant. However, based on current forecasts, the Company anticipates that itmay be noncompliant with this covenant sometime in the first half of 2009.Additionally, because the December 31, 2008 financial statements the Company willprovide to its lenders includes a report of its independent registered publicaccounting firm that contains an explanatory paragraph expressing doubt as toIdearc's ability to continue as a going concern, the Company will be noncompliantwith a second covenant. Noncompliance with this covenant is considered an event ofdefault under the senior secured facilities thirty days following notice of such defaultfrom the lenders. Upon an event of default, absent other potential remedies, thelenders may declare the total secured debt outstanding to be due and payable andupon acceleration, the Company's unsecured notes would also become due andpayable.
Idearc has evaluated various options for restructuring its capitalization and debtservice obligations to alleviate these covenant issues and to create a capital structurethat will permit the Company to remain a going concern. Idearc and its advisors haveconsidered various alternatives to strengthen its balance sheet and financial riskprofile. Among these alternatives, the Company is currently considering arestructuring through a "pre-packaged," "pre-negotiated," or similar plan ofreorganization under federal bankruptcy laws. Idearc and its advisors continue towork with representatives of holders of both the senior secured facilities and thesenior unsecured notes in this regard. If the Company is unable to achieve a "pre-
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packaged," "pre-negotiated," or similar plan o f reorganization, it would likely benecessary that the Company file for reorganization under federal bankruptcy lawsin any event.
"Simply stated, restructuring our capitalization and debt obligations to a moreappropriate level will provide us with the opportunity to prosper and grow in theyears ahead," Klein said. "We are dedicated to implementing an appropriate capitalstructure to support our new strategic business plans and objectives. A debtrestructuring plan that will strengthen Idearc's financial condition will position theCompany to compete more effectively in a challenging and rapidly evolvingeconomic environment.
"We would expect the Company to operate as usual throughout the restructuringprocess and continue to meet its obligations to consumers, clients and employees,just as we do now and have done in the past."
65. On March 12, 2009, the Company filed its Form 10-K for the year ended December
31, 2008 with the SEC (the “2008 Form 10-K”). This document which was signed by defendant
Klein, disclosed that the Company’s bad debts had mushroomed to 6.9%, a number well above 5.7 to
6.26 range that defendant Dee Jones had disclosed on July 29, 2008.
For 2008, bad debt expense represented 6.9% of our net revenue, an increase from5.0% in 2007. Small-and-medium-sized businesses tend to have fewer financialresources and higher rates of failure than larger businesses, in particular duringperiods of economic downturn, such as we are currently experiencing. These factorsincrease our exposure to delinquent accounts by our clients.
Bad debt expense of $206 million for the year ended December 31, 2008, increasedby $47 million, or 29.6% compared to $159 million for the year ended December 31,2007. The increased bad debt expense was influenced by the current weak economicenvironment, as well as the continuing effect of a temporary relaxation of certainaspects of our credit policy in mid-2007 associated with the transition of billingactivities from Verizon.
Bad debt expense as a percent of total operating revenue was 6.9% for the year endedDecember 31, 2008 compared to 5.0% for the year ended December 31, 2007.
Our primary source of funds continues to be cash generated from operations. Netcash provided by operating activities of $363 million in 2008 decreased $6 million,compared to $369 million in 2007, primarily due to lower cash collections coupledwith higher bad debt write-offs, and a contract settlement with a former reseller ofour advertising. These unfavorable items were partially offset by reduced transitioncosts related to our spin-off, lower income tax payments, as well as lower interestpayments.
* * *
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Bad debt expense as a percentage of revenue was 6.9%, 5.0%, and 4.3%, for theyears 2008, 2007 and 2006, respectively.
66. The 2008 Form 10-K was materially false and misleading because it failed to disclose
that the Company was on the verge of bankruptcy due to the relaxation of the Company’s credit
policies during mid-2007.
67. On March 16, 2008, PR Newswire reported that “ Idearc, Inc. 's Largest Shareholder
Challenges Bankruptcy as Unnecessary” in a story which stated:
The largest shareholder of Idearc, I nc. (Pink Sheets: I DA R) was shocked yesterdayto find, buried in a 17-page press release announcing 2008 financial results, languagethat indicated Idearc, I nc. would likely file for bankruptcy.
Today, Jack Corwin, the Company's largest shareholder and professional investor,sent a letter to each member of the Board of Directors urging that bankruptcy couldbe avoided by pursuing other readily-available alternatives. Corwin reminded theBoard that Idearc has sufficient cash on hand ($510 million at year-end 2008) to paydown enough of its outstanding debt to avoid the need for a bankruptcy, and failureto do so would be a breach of the Board's fiduciary duty to its shareholders.
* * *
There is growing speculation that the possible bankruptcy filing is part of a broaderplan on the part of the company to decrease its fair market value, and in doing somake it possible for it to capture future appreciation from its currently-distressedvaluation.
"This comes at a time when all eyes are on Corporate America to behave with theutmost fiduciary responsibility. Where alternatives may exist for companies to avoidbankruptcy it is highly unusual for a corporation to choose the route of bankruptcy atthe risk of damaging their business and harming their employees and otherstakeholders," said Corwin.
"The impact on local and national communities and economies is significant, to put
itmildly," Corwin continued, "which is why I have sent a letter to each member of theBoard of Directors asking them to consider all the other viable alternatives."
68. On March 19, 2009, PR Newswire announced that “Idearc's Largest Stockholder
Seeks Election as a Director:”
Based upon growing concerns over the governance of Idearc, I nc. (Pink Sheets:IDAR), the largest shareholder has notified the Company of his request to beincluded on the slate of directors to be voted upon at the upcoming stockholdersmeeting.
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" I n order to ensure that the interests of shareholders are regarded as paramount at theBoard level, I have decided to step to the plate," said Corwin, an experiencedbusinessman and professional investor. "This company [Idearc, Inc. ] has tremendouspotential, and frankly, the Board and Management have tremendous responsibility . .. to its investors, its employees, and its customers. Given the particulars of thecompany's financial situation, bankruptcy proceedings, indicated by the company aslikely, would leave many constituencies greatly disadvantaged and in some casesliterally wiped-out," Corwin continued. "In addition, I'm concerned that theCompany's customers -- -- particularly its biggest national customers - - will not wantto place advertising with a bankrupt company."
"I have received a steady wave of communications from numerous Idearcshareholders indicating that their concerns parallel those that I have raised," saidCorwin, who recently sent a letter to each member of Idearc's Board of Directorsurging that bankruptcy could be avoided by pursuing other readily-availablealternatives. In that letter, Corwin reminded the Board that Idearc has sufficient cashon hand ($510 million at year-end 2008) to pay down enough of its outstanding debtto avoid the need for a bankruptcy, and failure to do so would be a breach of theBoard's fiduciary duty to its shareholders.
Corwin's commitment to Idearc is significant. As contrasted from the existingDirectors who are only minimal stakeholders both individually and collectively (onedirector holds 30,000 shares, while most others own less than 10,000 shares each),Corwin holds greater than 12 million shares of Idearc stock.
69. On March 31, 2009, Idearc announcing that the Company has initiated voluntary
Chapter 11 proceedings in a press release which stated, in part:
Idearc Inc. announced that the Company and its domestic subsidiaries today filedvoluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Codein the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division.Idearc also announced that it has reached an agreement in principle with the agentbank and a steering group of its secured lenders on certain critical elements of a planof reorganization. The Company expects to be able to file a plan of reorganization inapproximately 30 days, and if implemented as proposed, this plan will enable Idearcto significantly reduce its outstanding debt to a more suitable level upon emergencefrom the legal proceedings.
Pursuant to the proposed plan, Idearc does not need nor intend to obtain debtor-in-possession (D I P) financing during the reorganization, as the Company maintainssubstantial cash balances and continues to generate positive cash flow, and hasreached an agreement on use of cash collateral.
Idearc expects to operate business as usual throughout its restructuring process, withno interruption in the solutions and services it provides to hundreds of thousands ofclients around the nation.
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"Today we take an important step forward as we continue to transform Idearc.Essentially we have a company with good potential being held back by a terminallyill balance sheet," said Scott W. Klein, chief executive officer of I dearc Inc. "We arenot only open for business and serving our clients as usual, we are also continuingour focus on transforming I dearc for the future based on a bold strategy, including allof the new programs launched earlier this month.
"The reorganization process will enable I dearc to quickly finalize and implement adebt restructuring plan that will strengthen our financial condition and position us tocompete more effectively in a challenging and rapidly evolving economicenvironment," Klein said.
"One of our most important priorities is to put in place an appropriate capitalstructure to support our strategic business plans and objectives. A new capitalstructure that can give all of our partners the confidence they need in us to be therefor them in the years ahead provides us with the greatest chance for success."
Under the agreement in principle with the agent bank and steering committee, theCompany's total debt will be reduced from approximately $9 billion today to a proforma level of $3 billion of secured bank debt, with a 12 percent interest rate and asix-year term. Mandatory amortization will be $60 million for each of the first twoyears following confirmation and $40 million per year thereafter. The Company willretain 32.5 percent of surplus cash flow, with the balance to be paid as additionalamortization on the bank debt. At emergence from Chapter 11, the Company willhave a cash balance of $150 million. Other terms of the plan are still to be negotiated,and it is anticipated that the remainder of the Company's bank debt and bonds will beconverted to equity.
Also, the agent bank and steering committee have agreed with the Company tocontinue to fund operations from all but $250 million of I dearc's more than $600million cash collateral balance. The remaining $250 million of cash collateral will bepaid to the secured lenders as adequate protection, subject to bankruptcy courtapproval of the Company's motion to use the cash collateral.
I dearc has also filed a variety of other customary first day motions with thebankruptcy court to enable it to continue to conduct business as usual while itcompletes its reorganization. These include motions providing for employees tocontinue to receive compensation and benefits as usual and to maintain customerprograms and guarantees. I dearc expects to file a motion with the bankruptcy courtshortly seeking to assume executory contracts related to its 30-year publishingagreement and 30-year branding agreement with Verizon Communications, Inc.
ADDITIONAL SCIENTER ALLEGATIONS
70. As alleged herein, the Individual Defendants acted with scienter in that defendants
knew that the public documents and statements issued or disseminated in the name of the Company
were materially false and misleading; knew that such statements or documents would be issued or
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disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, the Individual Defendants, by virtue of their
receipt of information reflecting the true facts regarding I dearc, their control over, and/or receipt
and/or modification of Idearc’s allegedly materially misleading misstatements and/or their
associations with the Company which made them privy to confidential proprietary information
concerning I dearc, participated in the fraudulent scheme alleged herein.
LOSS CAUSATION/ECONOMIC LOSS
71. During the Class Period, as detailed herein, the Individual Defendants engaged in a
scheme to deceive the market and a course of conduct which artificially inflated the prices of I dearc
securities and operated as a fraud or deceit on Class Period purchasers of I dearc securities by failing
to disclose the material adverse facts detailed herein. As a result of their purchases of Idearc
securities during the Class Period, plaintiff and the other Class members suffered economic loss, i.e.,
damages, under the federal securities laws.
72. By failing to disclose the material facts detailed herein, the I ndividual Defendants
presented a misleading picture of Idearc’s business and prospects. The Individual Defendants’ false
and misleading statements had the intended effect and caused I dearc securities to trade at artificially
inflated levels throughout the Class Period.
APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET DOCTRINE
73. At all relevant times, the market for Idearc securities was an efficient market for the
following reasons, among others:
(a) Idearc securities, at relevant times, met the requirements for listing, and was
listed and actively traded on the New York Stock Exchange (“NYSE”), a highly efficient and
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 25 of 31
automated market (the Company’s stock was delisted from the NYSE and currently is traded over-
the-counter);
(b) as a regulated issuer, Idearc filed periodic public reports with the SEC;
(c) Idearc regularly communicated with public investors via established market
communication mechanisms, including regular disseminations of press releases on the national
circuits of major newswire services and other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting services; and
(d) Idearc was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain customers of
their respective brokerage firms. Each of these reports was publicly available and entered the public
marketplace.
74. As a result of the foregoing, the market for Idearc securities promptly digested current
information regarding I dearc from all publicly available sources and reflected such information in
the prices of the stock. Under these circumstances, all purchasers of Idearc securities during the
Class Period suffered similar injury through their purchase of Idearc securities at artificially inflated
prices and a presumption of reliance applies.
NO SAFE HARBOR
75. 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.
Many of the specific statements pleaded herein were not identified as “forward-looking statements”
when made. To the extent there were any forward-looking statements, 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 does apply to any forward-looking statements pleaded herein, defendants are
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 26 of 31
liable for those false forward-looking statements because at the time each of those forward-looking
statements were made, the particular speaker knew that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized and/or approved by an executive officer
of Idearc who knew that those statements were false when made.
CLASS ACTION ALLEGATIONS
76. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons who purchased or otherwise acquired Idearc securities
during the Class Period (the “Class”). Excluded from the Class are defendants, the officers and
directors of the Company, members of their immediate families and their legal representatives, heirs,
successors, and assigns, and any entity in which defendants have or had a controlling interest.
77. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court. Idearc has more than 148 million shares of stock outstanding, owned by
hundreds if not thousands of persons.
78. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a) whether defendants violated the 1934 Act;
(b) whether defendants omitted and/or misrepresented material facts;
(c) whether defendants’ statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) whether defendants knew or deliberately disregarded that their statements
were false and misleading;
(e) whether the price of Idearc securities was artificially inflated; and
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 27 of 31
(f) the extent of damage sustained by Class members and the appropriate measure
of damages.
79. Plaintiff’s claims are typical of those of the Class because plaintiff and the Class
sustained damages from defendants’ wrongful conduct.
80. Plaintiff will adequately protect the interests of the Class and has retained counsel
who are experienced in class action securities litigation. Plaintiff has no interests which conflict
with those of the Class.
81. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy.
For Violation of §10(b) of the 1934 Actand Rule 10b-5 Against All Defendants
82. Plaintiff repeats and real l eges each allegation alleged herein.
83. During the Class Period, defendants disseminated or approved the false statements
specified above, which they knew or deliberately disregarded were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.
84. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:
(a) employed devices, schemes and artifices to defraud;
(b) made untrue statements of material facts or 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; or
(c) engaged in acts, practices and a course of business that operated as a fraud or
deceit upon plaintiff and others similarly situated in connection with their purchases of Idearc
securities during the Class Period.
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 28 of 31
85. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices for Idearc securities. Plaintiff and the Class would
not have purchased Idearc securities at the prices they paid, or at all, if they had been aware that the
market prices had been artificially and falsely inflated by defendants’ misleading statements.
For Violation of § 20(a) of the 1934 ActAgainst All Defendants
86. Plaintiff repeats and real l eges each allegation alleged herein.
87. The Individual Defendants acted as controlling persons of Idearc within the meaning
of §20(a) of the 1934 Act. By reason of their positions with the Company, and their ownership of
Idearc stock, the Individual Defendants had the power and authority to cause Idearc to engage in the
wrongful conduct complained of herein. By reason of such conduct, defendants are liable pursuant
to §20(a) of the 1934 Act.
JURY DEMAND
88. Plaintiff demands a trial by jury.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;
B. Awarding plaintiff and the members of the Class damages, including interest;
C. Awarding plaintiff reasonable costs and attorneys’ fees; and
D. Awarding such equitable/injunctive or other relief as the Court may deem just and
proper.
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 29 of 31
DATED: June 5, 2009 Respectfully Submitted,
JOE KENDALLTexas Bar No. 11260700HAMILTON LINDLEYTexas Bar No. 24044838KENDALL LAW GROUP, LLP3232 McKinney Avenue, Suite 700Dallas, Texas 75204Telephone: 214-744-3000Facsimile: 214-744-3015
ROBERT J. DYER IIIJEFFREY A. BERENSDYER & BERENS LLP682 Grant StreetDenver, Colorado 80203Telephone: 303/861-1764303/395-0393 (fax)
MICHAEL I. FISTEL, JR.WILLIAM W. STONEHOLZER HOLZER & FISTEL, LLC200 Ashford Center North, Suite 300Atlanta, Georgia 30338Telephone: 770/392-0090770/392-0029 (fax)
ATTORNEYS FOR PLAINTIFF
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Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 30 of 31
CMTIFICATION OF MAAMM PLAINWFPVR9LANT TlP ODERAL SYiPiRI'lrIES LAWI
The undemgne d declares, as to the clam asserted n nder the federal securities lam, fast:
1. Plaintitfhas =viewed the complaint and authorized its filing.
2. Plaintiffdid hotpurhase mNar "uirs the smwity that is the^subject ofthis actsat the direction of Plaintiff's counsel or in order to partiolpaw in any private action under thefederal secaritics laws.
3. Plaintiff`is willing to serve as a representative party on behalrofthe cis, includingproviding testimony at dcposifim and trial, if necessary. I understand that this is not aclaim form, axed that Fny ability to alp in any recovmy as a member of the class is notdependent upon execution of this PlaintitrCertificatign.
4. Plaiotffs t msactions is the security that is the subject of this action during theClass Period are as follows:
fusses:
YO-n-"fcompapv DatefsjPurch 4^^d 9=JDARQ
%Y411 .2,
X1 % 1108 z to, X7.9. -1 ^ z^la ^ ^^aq^ •^_
Sates;ra1^ tam
Name ofd Valaw -% #_^hang Sod„Proce
MARQ Albtos 5000 '8450
5. During the three (3) years prior to the date of this certification, Plaintiff h is uotsought to serve or sawed as a Class representative in an action tllexi under the federalseevritics laws except for the following (Many):
Case 3:09-cv-0 1 049-N Document 1 Filed 06/05/2009 Page 31 of 31
6. Plaintiff will not aocot any mytnmt for as ming nm a rrr+xvontative parW on bAWE
of the class heynnd P9aintilrr. m rata share of any very, except such rcanomble ebauand expo (itcluding lost wage) directly relating to the repvt=tafion of the class asOrdered or approved by the court.
X declare under penalty of perjury that the foregoing is true and coretfct,
,Pacacutcd th is , day of -, 2,,,, i^ oeetk city - State
Case 3:09-cv-0 1 049-N Document 1-2 Filed 06/05/2009 Page 1 of 1
®IS 44 (Rev. J2/07) CIVIL COVER SHE TTheJ$44 civil coversheetand the information contained hereinneitherreplacenorsupplement the filing and serviceofpleadingsorotherpapersasrec^uiredhylaw, exceptasprovidedby focal rules of court. This form, approved by the Judicial Conference of the United Slates in September 1974, isrequired fort euse of the Clerk o#Court forthepurpose of initiatingthe civil docket sheet. (SEE INSTRUCTIONS ON THE REVERSE OF THE FORM.)
T. (a) PLAINTIFFS DEFENDANTSAlan Goldberg Scott W. Klein, Katherine J. Harless, Samuel D. Janes,
Andrew Coticchio p
W County of Residence of First Listed Plaintiff Broward, Florida County of Residence offirst Listed Defendant Dallas, Texas (EXCEPT IN U.S. PLAINTIFF CASES) (IN U.S. PLAINTIFF CASES ONLY)
NOTE: INLAND CONDEMNATION CASES, USE THE LOCATION OF THELAND INVOLVED.
(0) Attorney's (Finn Namg Address, and Telephone Number) Attorneys(Ifl(nown)
Kendall Law Group, LLP, 3232 McKinney Avenue, Suite 700,Dallas, Texas 75204 Telephone: 214-744-3000 13
II. BASIS OF,IURISDICTION (Place an"X"inone Box Only) III. CITI7ENS14IPOFPRINCIPALPARTIES (Placean"X" in One Box for PlaintiffFor Diversity Cases 0Ay) and One Box for Defendant)0 1 U.S. Goverment N 3 Federal Question PTF DEF PTY? D EF
Plaintiff (U.S. Government Not a Party) Citizen of This State 0 1 0 l Incorporated orPrincipal Place 0 4 04of Business In This State
32 U.S. Government N Diversity CitizenofAnottterState q 2 0 2 incospomtcdandPrincipalPlace 0 5 0 5Defendant ofBusiness In Another State(indicate Citizenship of Parties in Item 111)
Citizen or Subject of a 0 3 q 3 Foreign Nation 0 6 0 6Foreign Country
IV. NATURE OF SUIT Place au `x" in One Box O
q 110 Insurance PERSONAL INJURY PERSONAL INJURY {3 610 Agriculture n 422 Appc3123 USC 158 q 400 State Reapportionment0120Marine 0 31OAirplene 0 362 Personal Injury- 0620 Other Food&Drn8 n D 410Antitiust0 130 M11lerAct C1 315 Airplane Product Med. Malpractice CJ 625 Drug Related Seizure i 2S USC 157 0 430 Banks and Bankingq 140 Negotiable litsmunent Liability q 365 Personal Injury - of Property 21 USC 881 q 450 Commerce0 150 Recovery of Overpaymntt 0 32OAssault, Libel & Product Liability O 630 Liquor Laws r . ° q 460 Deportation&Enforcementofjudgment Slander 0 368 Asbestos Personal q 640 R.R. & Truck n t Copyjigfits 0 470 Racketeer InOuenced and I0 151 Medicare Act 13 330 Federal Employers' Injury Product O 650 Airline Regs n 830 Patent Corrupt Organizationsq 152 Recovery of Deihulted Liability Liability 0 660 Occupational n 840Trademark O 480 Consumer CreditStudent Loans q 340 Marine PERSONAL-PROPERTY Safety/Health 0 490 Cable/Sat TV
(Excl. Veterans) q 345 Marine Product q 370 Other Fraud 0 690 Other 0 810 Selective Serviceq 153 Recovery of Overpayment Liability O 371 Truth in Lending :s^ __-mrm ^ogaa?^ zxrw ^. X 850 SecuritiedCommodities/of Veteran's Benefits O 350 Motor Vehicle 0 380 OtherPersonal 0 710 Fair Labor Standards 0'861 HIA (139Sf1) Exchangen 160 Slockholdas' Suits 0 355 Motor Vehicle Property Damage Act 0 862 Black Lung (923) q 875 Customer Challengeq 190 Other Contract Product Liability 0 395 Property Damage O 720Labor/Mgmi.Relations Cl 863 DIWQDIR @ W(405(g)) 12USC3410 s0 195ContraotProducrLiabilky O 360 Other Personal Product Liability 0 730Labor/Mgmt.Rcportiug 0 864 SSID Title XVI 0 89DOther Statutory ActionsO 196 Franchise In' & Disclosure Act O 865 RSI 405 ,} 0 891 Agricultural Actsas'a ' s of ;RRYSOJAE' t w. a ^ySN 0 740RailwayLaborAct -r.' 11 at;vWTU'a?,yaa 11[ 0 992F.conotnic Stabilization Actq 210 Land Condemnation O 441 Voting 0 5IO Motions to Vacate q 790 Other Labor Litigation 0 870 Taxes (U.S. Plaintiff 0 893 Environmental Maners0 220 Foreclosure 0 442 Employment Sentence 0 791 Empl. Ret. Inc. orDelendant) 0 894 Energy Allocation Act0 230 Rent Lease & Ejectment 13 443 Housing/ Habeas Corpus: Security Act q 871 IRS—Third Panty 0 895 Freedom of information0 240 Torts to Land Accommodations D 530 Gencrzl 26 USC 7604 Act0 245 Tort PMdu3 Liability O 444 Welfare n 535 Death Panaity, q 90DAppeal of Fee Determination0290 All Other Real Property 0 445 Amer,w/Disabilides - 0 540 Mandamus & Other 0462 Naturalization Application Under Equal Access 1Employment 0 550 Civil Rights q 463 Habeas Carpus - to justice
O 446 Amer wJDisabtlities - q 555 Prison Condition Alien Detainee 0 950 Constitutionality orOther 0 465 Other Immigration State Statutes
0 440 Other Civil Rights Actions r0
f
V. ORIGIN (Place an "X" in One Box Only) Appeal to District'a 1 Original 2 from 0 3 Remanded from Reinstated or 0 g Transferred from 6 a
Proceeding State Court hate Court O 4 Reo erred another district ivla Judge
gMultidistrict p 7A ppe p Litigation g :zj
yyt1 Sg (specify) Judgment a
C^e ih Ut BSivil taa ti §o which you are filing (Do not cite jurisdictional statutes unless diversity):
VI. CAUSE Off' ACTIONT y 4 I t
Brief description of cause: js
VII. REQUESTED IN 0 CHECK T THIS IS A CLASS AC'T'ION DEMAND $ CRECIC YES only if demanded in complaint:COMPLAINT: UNDER F.R.C.P. 23
JURY DEMAND. 52( Yes d No !
VIII. RELATED CASE(S) ( yIF ANY (Sec instructions): JUDGE
Kinkeade DOCKET NUMBER 3:09-CV-00938 t
DATE SIGNATURE s . A .' n': F t ORD Iu
06/05/2009 {
FOR OFFICE USE ONLY
RECEIPT # AMOUNT APPLYING IFP JUDGE MAG. JUDGE
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