Einspahr v. Groupon, Inc. et al

Filing 1

COMPLAINT filed by Dennis Einspahr; Y. Filing fee $ 350, receipt number 0752-7026052. (Attachments: # 1 Certification of Plaintiff)(Wexler, Kenneth)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DENNIS EINSPAHR, Individually and on
Behalf of All Others Similarly Situated,

)
)
)
)
)

Plaintiff,
w.

Case No.

)

)
GROUP ON, INC., JASON E. CHILD, JOSEPH )
M. DELPRETO, ANDREWD. MASON,
)
ERIC P. LEFKOFSKY, PETER J. BARRIS,
)
KEVIN J. EFRUSY, MELLODY HOBSON,
)
BRADLEY A. KEYWELL, THEODORE J.
)
LEONSIS, HOWARD SCHULTZ, MORGAN
)
STANLEY & CO. LLC, GOLDMAN, SACHS
)
& CO., CREDIT SUISSE SECURITIES (USA)
)
LLC, ALLEN & COMPANY LLC, MERRILL
)
LYNCH, PIERCE, FENNER & SMITH INC.,
)
BARCLAYS CAPITAL INC., CITIGROUP
)
GLOBAL MARKETS INC., DEUTSCHE
)
BANK SECURITIES INC., J.P. MORGAN
)
SECURITIES LLC, WELLS FARGO
)
SECURITIES, LLC, WILLIAM BLAIR &
)
COMP ANY LLC, LOOP CAPITAL)
MARKETS, INC., RBC CAPITAL MARKETS
)
LLC and THE WILLIAMS CAPITAL GROUP, )
L.P.
)
)
Defendants.
)

CLASS ACTION COMPLAINT

DEMAND FOR JURY TRIAL

Plaintiff alleges the following based upon the investigation of plaintiff s counsel, which
included review of Groupon, Inc.' s filings with the Securities and Exchange Commission, as
well as regulatory filings and reports, securities analysts'

reports and advisories about the

company, press releases and other statements issued by Groupon, and media reports about the
company.

Plaintiff believes that substantial additional evidentiary support for the allegations

herein exists and will be developed after plaintiff has had a reasonable opportunity for discovery.
1

NATURE OF THE ACTION
1.

Plaintiff brings this action on behalf of himself and all other persons who

purchased or otherwise acquired shares of Groupon common stock between November 4, 2011
and March 30, 2012, inclusive (the "class period"), and/or who acquired shares of Groupon
common stock pursuant or traceable to the company's

false and misleading

Registration

Statement and Prospectus issued in connection with its November 4, 2011 initial public offering.
Plaintiff requests relief under the Securities Act of 1933 ("Securities Act") and the Securities
Exchange Act of 1934 ("Exchange Act").
2.

Groupon operates a web-based platform that connects consumers and merchants

through discounted offers known as "Groupons."

Groupons provide users with discounted goods

or services at participating merchants as long as a pre-determined amount of consumers agree to
also participate in the deal.
3.

On November 3,2011, Groupon announced the initial public offering price of$20

per share for 35 million shares of common stock (excluding an overallotment option to purchase
5.25 million additional shares granted to the underwriters).

The company realized net proceeds

of $658 million from the initial public offering.
4.

During the class period, defendants

issued materially

statements regarding Groupon's financial results and business practices.

false and misleading
Defendants-through

the Registration Statement and Prospectus issued in connection with the initial public offering
and throughout

the class period-reported

financial results that showed torrid growth and

represented that the company possessed competitive advantages that would continue to benefit
its business. Defendants failed to disclose adverse trends in Groupon's business and made false
statements concerning Groupon's

financial condition.

2

These false statements and omissions

allowed defendants to successfully offer Groupon's common stock at the initial public offering
price of $20 per share and resulted in the stock trading at artificially inflated prices thereafter,
reaching a class period high of$26.19 on November 18,2011.
5.

After the market closed on March 30, 2012, Groupon issued a press release

announcing a revision to its fourth quarter and full year 2011 financial results. Groupon reported
a reduction of $14.3 million in its fourth quarter revenue after initially reporting sales of $506.5
million. The reduction in fourth quarter revenue increased fourth quarter operating expenses and
reducing operating income by $30 million, net income by $22.6 million, and earnings per share
by $0.04.

Groupon explained that the "revisions are due primarily to an increase to the

Company's refund reserve accrual to reflect a shift in the Company's fourth quarter deal mix and
higher price point offers, which have higher refund rates."
6.

On this news, Groupon's stock dropped $3.10 per share to close at $15.28 per

share on April 2, 2012, a decline of 17% on volume of 10 million shares.
7.

The true facts, which were known by defendants but concealed from the investing

public during the class period, were as follows:
a. Groupon's financial results were materially false and misleading in violation of
GAAP;
b. Groupon's revenues were overstated in violation ofGAAP;
c. Groupon's business was neither growing to the extent represented by defendants
nor as resistant to competition as defendants suggested;
d. The Registration Statement and Prospectus concealed that the company was not in
compliance with the laws and regulations of some of the countries in which in
operated; and

3

e. Groupon's internal controls were so inadequate that its reported financial results
were not reliable.
JURISDICTION AND VENUE
8.

The claims asserted herein arise under Sections 11 and IS of the Securities Act,

IS US.C. §§77k and 770, Sections 10(b) and 20(a) of the Exchange Act, IS US.C. §§78j(b) and
78t(a), and Rule 10b-S promulgated thereunder by the SEC, 17 C.F.R. § 240.10b-S.
9.

The Court has jurisdiction over the subject matter of this action pursuant to 28

US.C. § 1331, Section 22 of the Securities Act, IS US.C. §77v, and Section 27 of the Exchange
Act, IS US.c.
10.

§78aa.
Venue

IS

proper m this District pursuant to 28 US.C.

§1391(b), because

defendants maintain an office in this District and many of the acts and practices complained of
herein occurred in substantial part in this District.

Groupon has offices located at 600 W.

Chicago Avenue, Suite 620, Chicago, Illinois 606S4.
11.

In connection with the acts and conduct alleged herein, defendants, directly and

indirectly, used the means and instrumentalities

of interstate commerce, including, but not

limited to, the United States mails, interstate telephone communications,

and the facilities of a

national securities exchange.
PARTIES
12.

Plaintiff Dennis Einspahr, as set forth in the accompanying

certification and

incorporated by reference herein, purchased Groupon common stock during the class period and
has been damaged thereby.
13.

Defendant Groupon operates a web-based marketplace that shares information

and connects merchants and consumers by facilitating group discounts for goods or services in

4

over 150 markets.

Groupon is headquartered

in Chicago, Illinois.

The company's

common

stock trades under the symbol GRPN on NASDAQ.
14.

Defendant Jason E. Child is the company's Chief Financial Officer. Child signed

or authorized the signed of the company's

materially

false and misleading

Registration

Statement.
15.

Defendant Joseph M. Del Preto is Groupon's

Preto signed or authorized the signed of the company's

Chief Accounting Officer.
materially

Del

false and misleading

Registration Statement.
16.

Defendant Andrew D. Mason co-founded the company and is the current Chief

Executive Officer and a director of Groupon.

Mason signed or authorized the signed of the

company's materially false and misleading Registration Statement.
17.

Defendant Eric P. Lefkofsky co-founded Groupon and is the current Executive

Chairman of the Board. Lefkofsky signed or authorized the signed of the company's materially
false and misleading Registration Statement.
18.

Defendant Peter J. Barris is a director of Groupon. Barris signed or authorized the

signed of the company's materially false and misleading Registration Statement.
19.

Defendant Kevin J. Efrusy is a director of Groupon. Efrusy signed or authorized

the signed of the company's materially false and misleading Registration Statement.
20.

Defendant

Mellody Hobson

is a director of Groupon.

Hobson

signed or

authorized the signed of the company's materially false and misleading Registration Statement.
21.

Defendant Bradley A. Keywell is a director of Groupon.

Keywell signed or

authorized the signed of the company's materially false and misleading Registration Statement.

5

22.

Defendant Theodore J. Leonsis is a director of Groupon.

Leonsis signed or

authorized the signed of the company's materially false and misleading Registration Statement.
23.

Defendant Howard A. Schultz is a director of Groupon.

Schultz signed or

authorized the signed of the company's materially false and misleading Registration Statement.
24.

The defendants referenced above in

,m 14-16 are referred to herein as the "Officer

Defendants. "
25.

The defendants referenced

above in

,m

16-23 are referred to herein as the

"Director Defendants," and are named as defendants solely for violations of the Securities Act.
26.

Defendant Morgan Stanley & Co. LLC ("Morgan Stanley") is an investment

banking firm that provides diversified financial advisory and security brokerage services on a
worldwide basis. The firm was formerly known as Morgan Stanley & Co. Inc. and changed its
name to Morgan Stanley & Co. LLC in June 2011. Morgan Stanley acted as lead book-running
manager and underwriter for Groupon's initial public offering and helped draft and disseminate
the offering documents.
27.

Defendant

Goldman,

Sachs & Co. ("Goldman")

is an investment

bank that

provides investment management, securities, and investment banking services to a worldwide
client base. Goldman acted as lead book-running manager and underwriter for Groupon's initial
public offering and helped draft and disseminate the offering documents.
28.

Defendant Credit Suisse Securities (USA) LLC ("Credit Suisse") is a full-service

investment bank operating in the United States.

Credit Suisse acted as lead book-running

manager and underwriter for Groupon's initial public offering and helped draft and disseminate
the offering documents.

6

29.

Defendant Allen & Company LLC ("Allen") provides underwriting, advisory and

brokerage services. Allen acted as book-running manager and underwriter for Groupon's initial
public offering and helped draft and disseminate the offering documents.
30.

Defendant Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch") is the

marketing name for the global banking and markets businesses of Bank of America Corporation.
Merrill Lynch acted as book-running

manager and underwriter

for Groupon's

initial public

offering and helped draft and disseminate the offering documents.
31.

Defendant Barclays Capital Inc. ("Barclays")

brokerage and advisory services.

provides clients with securities

Barclays acted as book-running manager and underwriter for

Groupon's initial public offering and helped draft and disseminate the offering documents.
32.

Defendant Citigroup Global Markets, Inc. ("Citigroup")

is a financial services

company that provides investment banking and underwriting services. Citigroup acted as bookrunning manager and underwriter for Groupon's

initial public offering and helped draft and

disseminate the offering documents.
33.

Defendant Deutsche Bank Securities Inc. ("Deutsche Bank") is the United States-

based securities and investment banking arm of Deutsche Bank AG. Deutsche Bank acted as
book-running manager and underwriter for Groupon's initial public offering and helped draft and
disseminate the offering documents.
34.

Defendant

J.P. Morgan

Securities, LLC ("JP Morgan")

provides investment

banking and underwriting services as part of JP Morgan Chase & Co. JP Morgan acted as bookrunning manager and underwriter for Groupon's
disseminate the offering documents.

7

initial public offering and helped draft and

35.

Defendant Wells Fargo Securities, LLC ("Wells Fargo") provides investment

banking, private placement and underwriting services and is a subsidiary of Wells Fargo & Co.
Wells Fargo acted as book-running

manager and underwriter

for Groupon's

initial public

offering and helped draft and disseminate the offering documents.
36.
services

Defendant William Blair & Company LLC ("William Blair")

firm that provides

management

services.

clients with equity research,

investment

William Blair acted as book-running

IS

a financial

banking

and asset

manager and underwriter

for

Groupon's initial public offering and helped draft and disseminate the offering documents.
37.

Defendant Loop Capital Markets, Inc. ("Loop Capital") is an investment bank and

brokerage firm offering securities sales, trading services and research.

Loop Capital acted as

book-running manager and underwriter for Groupon's initial public offering and helped draft and
disseminate the offering documents.
38.

Defendant RBC Capital Markets LLC ("RBC")

provides public and private

placement of debt and equity securities, corporate finance, underwriting and financial services.
RBC acted as book-running manager and underwriter for Groupon's initial public offering and
helped draft and disseminate the offering documents.
39.

Defendant The Williams Capital Group, L.P. ("Williams") is an investment bank

providing institutional

and individual investors with investment

management

and financial

services. Williams acted as book-running manager and underwriter for Groupon's initial public
offering and helped draft and disseminate the offering documents.
40.

The defendants named in ~~ 26-39 are referred to herein as the "Underwriter

Defendants. "

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41.

Defendant Groupon and the Officer Defendants and Director Defendants who

signed the Registration

Statement are strictly liable for the false and misleading statements

incorporated

The Underwriter

therein.

Defendants

drafted and disseminated

documents and were paid more than $42 million in connection therewith.
Defendants'

the offering

The Underwriter

failure to conduct an adequate due diligence investigation was a substantial factor

leading to the harm complained of herein.
CLASS ACTION ALLEGATIONS
42.

Plaintiff brings this action on his own behalf and as a class action pursuant to

Rules 23 (a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of all persons who
purchased or otherwise acquired Groupon common stock between November 4, 2011 and March
30, 2012, inclusive (the "class"). Excluded from the class are the defendants; the members of the
immediate families of defendants; any entity in which any defendant has a controlling interest;
any entity which is a parent or subsidiary of, or which is controlled by any defendant; and the
officers, directors, affiliates, legal representatives, heirs, predecessors, successors, and assigns of
defendants.
43.
impracticable.

The members of the class are so numerous that joinder of all members is
Throughout the class period, Groupon's common stock was actively traded on the

New York Stock Exchange in a well-developed and efficient market. While the exact number of
class members is unknown to plaintiff at this time, and can be ascertained

only through

appropriate discovery, during the class period more than 637 million shares of Groupon common
stock were outstanding.

Plaintiff believes there are, at a minimum, hundreds if not thousands of

members of the class. The disposition of their claims in a class action will provide substantial
benefits to the parties and the Court.

Record owners and other members of the class may be

9

identified from records maintained by Groupon or its transfer agent and may be notified of the
pendency of this action by mail, using a form similar to that customarily used in securities class
actions.
44.

Plaintiff s claims are typical of the claims of members of the class. All members

of the class were similarly affected by defendants' allegedly wrongful conduct in violation of
federal law as complained of herein.
45.

Plaintiff will fairly and adequately protect the interest of the members of the class.

Plaintiff has retained counsel competent and experienced in class and securities litigation.
46.

Common questions of law and fact exist as to all members of the class and

predominate over any questions solely affecting individual members of the class. The questions
of law and fact common to the class include:
a. whether the federal securities

laws were violated by defendants'

acts and

omissions as alleged herein;
b. whether the SEC filings, press releases, and other public statements made to the
investing public during the class period contained material misstatements

or

omitted to state material information; and
c. whether plaintiff and the members of the class have sustained damages as a result
of the conduct complained of herein, and if so, the proper measure of damages.
47.

A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy because, among other things, joinder of all members of the class
is impracticable.

Furthermore, because the damages suffered by individual class members may

be relatively small, the expense and burden of individual litigation make it impossible for

10

members of the class to individually redress the wrongs done to them.

There will be no

difficulty in the management of this action as a class action.
BACKGROUND
48.

Founded

in 2008,

Groupon

operates

a web-based

platform

that connects

consumers and merchants by offering discounted goods and services for more than 140 types of
businesses.

The company offers its services in over 150 markets worldwide, which users can

access through the company's website or mobile application.

Groupon also sends users a daily

email with information about current discount offers for goods and services based on users'
location and preferences.
49.

On November 30, 2010, media outlets reported that search engine giant Google,

Inc. offered approximately $6 billion to acquire Groupon.

Days later, on December 3, 2010,

media outlets reported that Groupon had declined Google's offer.
DEFENDANTS' FALSE AND MISLEADING STATEMENTS
50.

On June 2, 2011, Groupon

filed a Form S-l

Registration

Amendments with the SEC in connection with its initial public offering.

Statement

and

The SEC declared the

Registration Statement effective on November 3, 2011.
51.

On November 3,2011, Groupon filed a Form S-lIA Registration Statement with

the SEC to facilitate its public offering of 35 million shares of Groupon common stock.
52.

The Prospectus for the initial public offering, which was part of the Registration

Statement, made several statements about Groupon's competitive advantages.

The company

stated that it could leverage its data to improve its customers' experience and trust in Groupon,
use its extensive merchant scale to ensure the quality of its deals, and benefit from its "trusted

11

and recognizable

brand by delivering

a compelling

value proposition

to consumers

and

The Prospectus made representations about the Groupon's financial results.

The

merchants."
53.

company stated that the "summary consolidated statements of operations data for the periods
ended September 30, 2010 and 2011 and the balance sheet data as of September 30, 2011" were
"prepared on a basis consistent with that used to prepare our audited financial statements and
includes all adjustments, consisting of normal and recurring items, that we consider necessary for
a fair presentation of the unaudited period."

Groupon also detailed its procedures for revenue

recognition and calculating its refund reserve.
54.

In addition, the Prospectus

contained an August 2011 email from Mason to

Groupon's staff regarding the company's future, along with a disclosure that investors should not
rely upon the email in making their investment decisions.

In the email, which was leaked to

media outlets prior to Groupon's initial public offering, Mason made several statements about
the company's business and prospects and how Groupon had "never been stronger":
I'll summarize my excitement [about the future of Groupon's business] in four
points: 1) Growth in our core business is strong 2) Our investments in the
future-businesses
like Getaways & NOW-look
great, 3) We are pulling away
from competition, and 4) We've built a great team that I would pit against anyone.
In other words, all the stuff that one would want to look good? It looks good.
Many of the long-term unknowns of our business are becoming known, and we
like the answers.

*

*

*

*

*

My point is not that our competitors will fail-some
may actually develop
sustainable businesses, or even grow-after
all, local commerce is an enormous
market. The real point is that our business is a lot harder to build than people
realize and our scale creates competitive advantages that even the largest
technology companies are having trouble penetrating. And with the launch of
NOW, I suspect our competition will have an even harder time in light of the
natural barriers to entry that are needed to build a real-time local deals
marketplace.

12

*

*

*

*

*

P. S.: I almost forgot to address the nonsense about us running out of money in the
article above. If you apply the same logic used in the article, you'd have
concluded long ago that companies like Amazon and Wal-Mart were running out
of cash too. Both have often had payables far in excess of their cash. Finance
geeks call this a working capital deficit. It's normal, manageable and a lot of folks
actually believe it's good thing and would kill to get paid from their customers
long before they have to pay their suppliers. Weare generating cash, not losing
it-we generated $25M in cash last quarter alone, adding to the $200M we had
before. In other words, we're doing the opposite of running out of money.
55.

On November 3, 2011, Groupon issued a press release announcing that it was

conducting an initial public offering of 35 million shares of common stock at $20 per share, and
had granted its underwriters a 30-day option to purchase up to an additional 5.25 million shares.
The company stated that the stock would trade under the symbol "GRPN" on NASDAQ, and that
the Underwriter Defendants would serve as lead and additional book-running managers.
56.

On February 8, 2012, Groupon issued a press release announcing its fourth

quarter and full year 2011 financial results.

The company filed a Form 8-K incorporating the

press release with the SEC on the same day. Groupon's press release stated:
Revenue increased 194% to $506.5 million in the fourth quarter 2011, compared
to $172.2 million in the fourth quarter 2010. The unfavorable impact from yearover-year changes in foreign exchange rates throughout the quarter was $3.5
million.
Gross billings, which reflects the gross amounts collected from
customers for Groupons sold, excluding any applicable taxes and net of estimated
refunds, increased 201% to $1.25 billion in the fourth quarter 2011, compared
with $415.3 million in the fourth quarter 2010.
"Groupon had a strong fourth quarter and we finished 2011 having helped
250,000 local merchants across 47 countries grow their businesses while saving
Groupon customers billions of dollars," said Andrew Mason, CEO and CoFounder of Groupon. "We will continue to invest in new services and tools that
help our merchant partners be more successful and drive local commerce around
the world."

13

57.

The press release also contained detailed information about Groupon's

fourth

quarter and full year 2011 financial results. For the fourth quarter, Groupon reported a net loss
of $42.7 million, or $0.08 diluted EPS, and revenue of $506.5 million. The company reported a
net loss of $350.8 million, or $0.97 diluted EPS, and revenue of $1.6 billion for the 2011 full
year.

Groupon also provided first quarter 2012 guidance, estimating that its income from

operations would be between $15 million and $35 million and revenue between $510 million and
$550 million.
58.
Groupon's

On this news, Groupon's

stock declined to $21.17 per share.

However,

stock continued to trade at artificially inflated levels as defendants concealed the

company's improper accounting procedures and overstated revenues.
59.

After the market closed on March 30, 2012, Groupon issued a press release

announcing a revision to its fourth quarter and full year 2011 financial results.

The company

reported a reduction of $14.3 million in its fourth quarter revenue after initially reporting sales of
$506.5 million.

The reduction in fourth quarter revenue increased fourth quarter operating

expenses and reducing operating income by $30 million, net income by $22.6 million, and EPS
by $0.04.

Groupon explained that the "revisions are due primarily to an increase to the

Company's refund reserve accrual to reflect a shift in the Company's fourth quarter deal mix and
higher price point offers, which have higher refund rates." The release also stated:
"We remain confident in the fundamentals of our business, as our performance
continues to highlight the value that we provide to customers and merchants,"
said Jason Child, Groupon CFO. Groupon affirmed its guidance contained in its
February 8, 2012 press release regarding expectations for first quarter 2012
revenue of $510 million to $550 million and income from operations of $15
million to $35 million. This guidance includes approximately $35 million for
stock-based compensation and acquisition-related expense, and it assumes no
material business acquisitions or investments and no further revisions to stockbased compensation estimates.

14

In conjunction with the completion of the audit of Groupon' s financial statements
for the year ended December 31, 2011 by its independent auditor, Ernst & Young
LLP, the Company included a statement of a material weakness in its internal
controls over its financial statement close process in its Annual Report on Form
10-K for year ended December 31, 2011. The Company has been working for
several months with another global accounting firm in preparation for reporting
on the effectiveness of its internal controls by the end of 2012, as required
following Groupon's initial public offering last year. The Company continues to
implement process improvement initiatives and augment its staffing, and is
expanding the accounting firm's engagement scope to address the underlying
causes of the material weakness. Further discussion of the material weakness can
be found in the Company's Form 10-K, filed today with the SEC.
60.

As mentioned in the press release, Groupon filed its Form 10-K with the SEC on

March 30, 2012. In that filing, the company disclosed that management "concluded [that] there
is a material weakness in the design and operating effectiveness of our internal control over
financial reporting."

Groupon stated that the "primary factors" contributing to the material

weakness were:
•

We did not maintain financial close process and procedures that were
adequately designed, documented and executed to support the accurate and
timely reporting of our financial results. As a result, we made a number of
manual post-close adjustments necessary in order to prepare the financial
statements included in this Form 10-K.

•

We did not maintain effective controls to provide reasonable assurance that
accounts were complete and accurate and agreed to detailed support, and that
account reconciliations were properly performed, reviewed and approved
While these activities should be performed in the ordinary course of our
preparing our financial statements, we instead needed to undertake significant
efforts to complete reconciliations and investigate items identified in those
reconciliations during the course of our financial statement audit.

•

We did not have adequate policies and procedures in place to ensure the
timely, effective review of estimates, assumptions and related reconciliations
and analyses, including those related to customer refund reserves. As noted
previously, our original estimate disclosed on February 8 of the reserve for
customer refunds proved to be inadequate after we performed additional
analysis.

15

61.

On March 30,2012, The New York Times published an article entitled "Groupon's

shares fall on revision," which stated in part:
Founded only four years ago, the company has experienced astonishing growth as
it came to dominate the world of daily deals. Last year, investors clamored for
shares of the newly public company, which was valued as high as $20 billion.
But Groupon has suffered a number of missteps in the harsh glare of scrutiny,
particularly related to its accounting.
Last summer, the company was forced to drop a widely criticized profit measure
that excluded marketing costs. Several months later, Groupon restated its revenue
after the Securities and Exchange Commission challenged its methodology.
On Friday, Groupon said the latest accounting problems related to certain
assumptions and forecasts the company used to calculate its results. In particular,
the company said it underestimated customer refunds for higher-priced offers like
laser eye surgery.
Groupon collects more revenue on such deals, but they also carry a higher rate of
refunds. The company honors customer refunds for the life of its coupons, so
those payments can affect its financials at various times.
Groupon deducts refunds within 60 days from revenue; after that, the company
has to take an additional accounting charge related to the payments.
As Groupon prepared its financial statements for 2011, its auditor, Ernst &
Young, determined that the company did not accurately account for the possibility
of higher refunds. By the firm's assessment, that constituted a "material
weakness."
62.

Also on March 30, 2012, The Financial

Times published an article entitled

"Groupon restates 2011 results," which stated in part:
Groupon has revealed an accounting restatement that had the effect of wiping out
its operating profit for the final months of last year, extending the series of
financial hiccups that have bedeviled the fast-growing online coupons company.
The news late on Friday included an admission of "material weakness" in its
internal controls and comes just six months after its initial public offering. It
triggered a 7 percent drop in its shares in after-hours trading.

16

Groupon blamed the restatement on its failure to account properly for its move
into new markets where there is a higher chance that consumers will demand a
refund.
Customers who buy coupons that give a discount on high-value services, such as
laser eye surgery or hair removal, are more likely to ask for their money back,
according to the company, forcing it to withhold more of its money in a refund
reserve. The expansion into higher-risk categories like this only took place late
last year, Groupon said, leading to a restatement just of the final quarter's figures.
The accounting change reduced the company's reported operating income for the
period by $30m - more than wiping out the $15m it had previously reported for
the period. It had less impact of revenues, shaving $14.3m from the $506 m that
had been reported before.
63.

On April 2, 2012, Stifel Nicolaus, an analyst firm, downgraded Groupon to "sell"

from "hold," commenting that:
This is bigger than an accounting and trust issue - in our view, the higher level
of consumer returns implies that the Groupon platform may have some trouble
extending to higher ticket items. The company claims that the returns do not
threaten its expansion and growth. We prefer to wait and see. The rationale for the
accounting restatement opens up the possibility that Groupon's addressable
market will be more limited than we thought before.
64.

On this news, Groupon's stock dropped $3.10 per share to close at $15.28 per

share on April 2, 2012, a decline of 17% on volume of 10 million shares.
65.

The true facts, which were known by the defendants but concealed from the

investing public during the class period, were as follows:
a. Groupon's financial results were materially false and misleading in violation of
GAAP;
b. Groupon's revenues were overstated in violation ofGAAP;
c. Groupon's business was neither growing to the extent represented by defendants
nor as resistant to competition as defendants suggested;

17

d. The Registration Statement and Prospectus concealed that the company was not in
compliance with the laws and regulations of some of the countries in which in
operated; and
e. Groupon's internal controls were so inadequate that its reported financial results
were not reliable.
66.

The market for Groupon's common stock was open, well-developed and efficient

at all relevant times. The company's common stock traded at artificially inflated prices during
the class period as a result of defendants' materially false and misleading statements and failure
to disclose material information.

Plaintiff and class members purchased or otherwise acquired

Groupon common stock in reliance upon the integrity of the market price and market information
relating to Groupon, and have been damaged thereby.
67.

During the class period, defendants materially misled the market and artificially

inflated the price of Groupon common stock by publicly issuing false and misleading statements
and omitting to disclose material facts necessary to make defendants'
herein, not false and misleading.

statements, as set forth

The statements were false and misleading because they failed

to disclose material adverse information and misrepresented the truth about Groupon's business
and operations.
68.

At all relevant times, the material misrepresentations

and omissions described

herein directly or proximately caused, or were a substantial contributing cause of, the damages
sustained by plaintiff and members of the class. Plaintiff and class members purchased Groupon
common stock at artificially inflated prices.

But, after the market learned the truth about the

company's business and operations, the price of Groupon' s stock precipitously declined, falling
about 41 % from its class period high. As a result, plaintiff and class members were damaged.

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ADDITIONAL SCIENTER ALLEGATIONS
69.

As alleged herein, Groupon, the Officer Defendants

and Director Defendants

acted with scienter in that they knew that they public documents and statements issued or
disseminated

in Groupon's

name were materially

false and misleading;

knew that such

statements or documents would be issued or disseminated to the investing public; and knowingly
and substantially participated or acquiesced in the issuance or dissemination of such statements
or documents are primary violations of the federal securities laws. As set forth in detail herein,
these defendants, by virtue of their receipt of information reflecting the true facts regarding
Groupon, their control over, receipt and/or modification or Groupon's

materially misleading

statements, and/or their associations with the Company which made them privy to confidential
proprietary information

concerning

Groupon, participated

in the fraudulent

scheme alleged

The statutory safe harbor provided for certain forward-looking

statements does

herein.
NO SAFE HARBOR
70.

not apply to any of the false statements alleged in this complaint.

To the extent that projected

revenues and earnings were included in Groupon's financial reports prepared in accordance with
GAAP, including those filed with the SEC on Form 8-K, they are excluded from the protection
of the statutory safe harbor. 15 U.S.C. §78u-5(b)(2)(A).
71.

In the alternative, to the extent that the statutory safe harbor does apply to any

statement pleaded herein which is deemed to be forward-looking, defendants are liable for such
false forward-looking statements because at the time each such statement was made, the speaker
actually knew or recklessly disregarded the fact that such forward-looking

statements were

materially false or misleading or omitted facts necessary to make statements previously made not

19

materially false and misleading, or that each such statement was authorized or approved by a
director or executive officer of the company who actually knew or recklessly disregarded the fact
that each such statement was false and/or misleading when made. None of the historic or present
tense statements made by the defendants was an assumption underlying or relating to any plan,
projection, or statement of future economic performance, as they were not stated to be such an
assumption underlying or relating to any projection or statement of future economic performance
when made, nor were any of the projections or forecasts made by the defendants expressly
related to or stated to be dependent on those historic or present tense statements when made.
LOSS CAUSATIONIECONOMIC
72.

LOSS

During the class period, defendants engaged in a scheme to deceive the market

and a course of conduct that artificially inflated Groupon's stock price and operated as a fraud or
deceit on class period purchasers of common stock by misrepresenting the company's financial
condition and business prospects.

Once the defendants'

misrepresentations

and fraudulent

conduct were disclosed to the market, stock price reacted negatively as the artificial inflation was
removed from it. As a result, plaintiffs and class members suffered economic loss.
73.

The defendants'

false and misleading statements had the intended effect and

caused the securities to trade at artificially inflated levels throughout the class period.
74.

As investors and the market became aware of defendants'

misstatements

and

omissions and that Groupon's actual financial condition and business prospects were, in fact, not
as represented, the company's stock price reacted negatively, damaging investors.
APPLICABILITY

75.

OF THE PRESUMPTION OF RELIANCE: FRAUD-ON- THEMARKET DOCTRINE

At all relevant times, the market for Groupon's common stock was an efficient

market for the following reasons, among others:

20

a. Groupon's common stock met the requirements for listing, and was listed and
actively traded on NASDAQ;
b. Groupon filed periodic public reports with the SEC during the class period;
c. Groupon regularly communicated
communication

with public investors via established market

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;
d. Groupon was followed by numerous

securities analysts employed by major

brokerage firms who wrote reports that were distributed to the sales force and
certain customers of their respective brokerage firms during the class period.
Each of these reports was publicly available and entered the public marketplace;
and
e. Unexpected

material

news

about

Groupon

was rapidly

reflected

III

and

incorporated into the company's stock price during the class period.
76.

As a result of the foregoing, the market for Groupon's common stock promptly

digested current information regarding the company from all publicly available sources and
reflected such information in Groupon's stock price. Under these circumstances, all purchasers
of the company's

common stock during the class period suffered similar injury through their

purchase of Groupon' s common stock at artificially inflated prices, and a presumption of reliance
applies.

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COUNT I
(Violation of Section 11 of the Securities Act)
(Against All Defendants)
77.

Plaintiff incorporates ~~ 1-68 by reference.

78.

This count does not sound in fraud. All of the preceding allegations of fraud or

fraudulent conduct and/or motive are specifically excluded from this count. Plaintiff does not
allege that the Officer Defendants, Director Defendants or the Underwriter Defendants had
scienter or fraudulent intent, which are not elements of a Section 11 claim.
79.

The Registration

Statement for the initial public offering was inaccurate and

misleading, contained untrue statements of material facts, omitted to state other facts necessary
in order to make the statements made not misleading, and omitted to state material facts required
to be stated therein.
80.

Groupon is the registrant for the initial public offering.

The defendants named

herein were responsible for the content and dissemination of the Registration Statement.
81.

As the issuer of the shares, Groupon is strictly liable to plaintiff and the class for

any misstatements and omissions.
82.

None of the defendants

named herein made a reasonable

investigation

or

possessed reasonable grounds for the belief that the statements contained in the Registration
Statement were true and without omissions of any material facts and were not misleading.
83.

By reason of the conduct

alleged herein, each defendant

violated,

and/or

controlled a person who violated Section 11 of the Securities Act.
84.

Plaintiff acquired Groupon shares pursuant and/or traceable to the Registration

Statement.

22

85.

Plaintiff and class members have sustained damages.

The value of Groupon's

common stock has declined as a result of defendants' violations.
86.

At the time of their purchases or Groupon shares, plaintiff and class members did

not have knowledge of the facts concerning the wrongful conduct alleged herein and could not
have reasonably discovered those facts prior to March 30, 2012. Less than one year has elapsed
from the time that plaintiff discovered or reasonably could have discovered the facts upon which
this complain is based, and less than three years have elapsed between the time Groupon offered
shares to the public and plaintiff filed this complaint.
COUNT II
(Violation of Section 15 of the Securities Act)
(Against Groupon, the Officer Defendants and the Director Defendants)
87.

Plaintiff incorporates ~~ 1-68 and ~~ 77-86 by reference.

88.

The Officer Defendants and the Director Defendants each were control persons of

Groupon by virtue of their positions as directors and/or senior officers of the company.

The

Officer Defendants and the Director Defendants each had a series of indirect and/or direct
business

and/or personal

shareholders of Groupon.

relationships

with other directors

and/or officers

and/or major

Groupon controlled the Officer Defendants, the Director Defendants

and all of Groupon' s employees.
89.

Groupon, the Officer Defendants and the Director Defendants were each culpable

participants in the violations of Section 11 of the Securities Act alleged in the count above
because they signed or authorized the signing of the Registration

Statement and otherwise

participated in the process which allowed the initial public offering of Groupon' s common stock
to be successfully completed.

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COUNT III
(Violation of Section lO(b) of the Exchange Act and Rule lOb-5 Promulgated Thereunder
(Against Groupon and the Officer Defendants)
90.

Plaintiff incorporates ~~ 1-89 by reference.

91.

During the class period, Groupon and the Officer Defendants carried out a plan,

scheme and course of conduct which was intended to, and throughout the class period, did: (1)
deceive the investing public, including plaintiff and other class members, as alleged herein; and
(2) caused plaintiff and other class members to purchase Groupon stock at artificially inflated
and distorted prices.

In furtherance of this unlawful scheme, plan and course of conduct,

Groupon and the Officer Defendants, individually and as a group, took the actions set forth
herein.
92.

Groupon and the Officer Defendants, individually and in concert, directly and

indirectly, by the use, means or instrumentalities
engaged and participated

in a continuous

of interstate commerce and/or of the mails,

course of conduct to conceal adverse material

information about the business, operations and future prospects of the company as specified
herein.
93.

Groupon and the Officer Defendants employed devices, schemes and artifices to

defraud, while in possession of material adverse non-public information and engaged in acts,
practices, and a course of conduct as alleged herein in an effort to assure investors of Groupon' s
value and performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Groupon and its business operations
and future prospects in light of the circumstances under which they were made, not misleading,
as set forth more particularly herein, and engaged in transactions, practices and a course of

24

business that operated as a fraud and deceit upon the purchasers of the securities during the class
period.
94.

Groupon

misrepresentations

and

the

Officer

Defendants

had

actual

knowledge

of

the

and omissions of material facts set forth herein, or acted with reckless

disregard for the truth in that they failed to ascertain and to disclose such facts, even though such
facts were available to them.

These material misrepresentations

and/or omissions were made

knowingly or recklessly by Groupon and the Officer Defendants and for the purpose and effect
of supporting the artificially inflated price of the company's shares.
95.

As a direct and proximate

result of Groupon

and the Officer Defendants'

wrongful conduct, plaintiff and class members suffered damages in connection with their
respective purchases of Groupon stock during the class period.
COUNT IV
(Violation of Section 20(a) of the Exchange Act)
(Against Groupon and the Officer Defendants)
96.

Plaintiff incorporates ~~ 1-95 by reference.

97.

Groupon and the Officer Defendants

acted as controlling persons within the

meaning of Section 20 of the Exchange Act. The Officer Defendants were controlling persons of
Groupon during the class period due to their senior executive positions with the company; their
direct involvement in the company's day-to-day operations; their ownership of Groupon stock;
their signatures on and participation in the preparation and dissemination

of the company's

public filings and statements; and their power and ability to influence and control, directly or
indirectly, the decision-making of Groupon, including the content of its financial statements and
other public statements.

Groupon controlled the Officer Defendants and all of the company's

25

employees.

Groupon and the Officer Defendants had the power and authority to cause the

company to engage in the wrongful conduct complained herein.
98.

By reason of such conduct, Groupon and the Officer Defendants

are liable

pursuant to Section 20(a) of the Exchange Act.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for relief and judgment, as follows:
A.

Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

B.

Awarding plaintiff and class members damages and interest;

C.

Awarding plaintiffs reasonable costs, including attorney's fees;

D.

Awarding rescission or a rescissionary measure of damages; and

E.

Awarding such equitable/injunctive

or other relief as the Court may deem just and

proper.

JURY DEMAND
Plaintiff hereby demands a trial by jury.
DATED: April 6, 2012

Respectfully submitted,
By: lsi Kenneth A. Wexler
Kenneth A. Wexler
Mark R. Miller
WEXLER WALLACE LLP
55 West Monroe St., Suite 3300
Chicago, IL 60603
Telephone: [phone]
Facsimile: [phone]

26

Daniel C. Girard
Jonathan K. Levine
Ian P. Samson
GIRARD GIBBS LLP
601 California Street, Suite 1400
San Francisco, CA 94108
Telephone: [phone]
Facsimile: [phone]
Attorneys for Plaintiff

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