In December 2006, the appellate court overturned the certification of classes in six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement.
In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the court for approval. The terms of the settlement if approved, would dismiss and release all claims against the participating defendants (including the Company). In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. On August 31, 2005, the court confirmed preliminary approval of the settlement.
According to the Company’s FORM 10-Q For the Quarterly Period Ended March 31, 2003, between June 5 and July 26, 2001, four class action complaints, alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20 of the Securities Exchange Act of 1934, were filed in the United States District Court for the Southern District of New York against the Company, certain of its officers and directors and certain underwriters of the Company’s initial public offering (IPO). On August 9, 2001, these actions were consolidated before a single judge along with cases brought against numerous other issuers and their underwriters that make similar allegations involving the IPOs of those issuers. The consolidation was for purposes of pretrial motions and discovery only. Plaintiffs filed an amended complaint on April 20, 2002. On July 15, 2002, the Company and the individual defendants, along with the other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. Arguments for and against the motion to dismiss were presented to the court on November 1, 2002. The court denied the Company’s motion on February 19, 2003. Discovery is currently ongoing.
The complaint alleges that Expedia, Inc. and certain of its officers violated the federal securities laws by issuing and selling Expedia common stock pursuant to the initial public offering without disclosing to investors that at least two of the lead underwriters and two of the other underwriters of the IPO had solicited and received excessive and undisclosed commissions from certain investors.
In exchange for the excessive commissions, the complaint alleges, lead underwriters The Goldman Sachs Group, Inc. and Morgan Stanley Dean Witter & Co., Inc. and underwriters FleetBoston Robertson Stephens, Inc. and Merrill Lynch, Pierce, Fenner & Smith, Inc. allocated Expedia shares to customers at the IPO price of $14.00 per share. To receive the allocations (i.e., the ability to purchase shares) at $14.00, the defendant underwriters' brokerage customers had to agree to purchase additional shares in the aftermarket at progressively higher prices. The requirement that customers make additional purchases at progressively higher prices as the price of Expedia stock rocketed upward (a practice known on Wall Street as ``laddering'') was intended to (and did) drive Expedia's share price up to artificially high levels. This artificial price inflation, the complaint alleges, enabled both the underwriters and their customers to reap enormous profits by buying Expedia stock at the $14.00 IPO price and then selling it later for a profit at inflated aftermarket prices, which rose as high as $65.88 during its first day of trading.
Rather than allowing their customers to keep their profits from the IPO, the complaint alleges, the defendant underwriters required their customers to ``kick back'' some of their profits in the form of secret commissions. These secret commission payments were sometimes calculated after the fact based on how much profit each investor had made from his or her IPO stock allocation.
The complaint further alleges that defendants violated the Securities Act of 1933 because the Prospectus distributed to investors and the Registration Statement filed with the SEC in order to gain regulatory approval for the Expedia offering contained material misstatements regarding the commissions that the underwriters would derive from the IPO and failed to disclose the additional commissions and ``laddering'' scheme discussed above.