1 Amended Consolidated Class Action Complaint 01/09/2015
Transcript of 1 Amended Consolidated Class Action Complaint 01/09/2015
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COHN LIFLAND PEARLMAN HERRMANN & KNOPF LLP
PETER S. PEARLMAN JEFFREY W. HERRMANN Park 80 West - Plaza One 250 Pehle Avenue, Suite 401 Saddle Brook, NJ 07663 Telephone: 201/845-9600 201/845-9423 (fax)
Liaison Counsel
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
In re INTERCLOUD SYSTEMS, INC. SECURITIES LITIGATION
This Document Relates To:
No. 3:14-cv-02072-PGS-TJB
Master Docket No. 3:14-01982-PGS-DEA
CLASS ACTION
AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
) JURY TRIAL DEMAND
)
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TABLE OF CONTENTS
Page
I. SUMMARY OF THE ACTION...................................................................... 1
II. JURISDICTION AND VENUE ...................................................................... 6
III. PARTIES ......................................................................................................... 7
A. Plaintiff .................................................................................................. 7
B. Defendants ............................................................................................. 7
IV. SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS ......................... 13
A. Background of the Company ............................................................... 13
B. The Undisclosed Paid Promotional Scheme ....................................... 14
1. “5 Reasons To Buy InterCloud Systems Right Now,” Published on December 3, 2013 ............................................... 15
2. “Watch How InterCloud Grows Under The Guidance Of Mark Munro,” Published on December 17, 2013 ..................... 20
3. “InterCloud Systems: A Cloud Integrator With Strong Growth Potential,” Published on January 13, 2014 .................. 24
C. The Truth About Defendants’ Paid Promotional Scheme Is Revealed.............................................................................................. 29
D. The Undisclosed Paid Promotions Violated Section 17(b) of the Securities Act of 1933 ......................................................................... 38
E. Defendants Knew of, or Recklessly Disregarded that, the Paid Articles Were False and Misleading and Did Not Contain Appropriate Disclosures ...................................................................... 40
V . LOSS CAUSATION ..................................................................................... 42
A. March 13, 2014 Disclosure ................................................................. 44
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Page
B. March 17, 2014 Disclosure ................................................................. 46
C. March 20, 2014 Disclosure ................................................................. 47
D. March 27, 2014 Disclosure ................................................................. 49
VI. PRESUMPTION OF RELIANCE ................................................................ 53
VII. NO SAFE HARBOR ..................................................................................... 56
VIII. PLAINTIFF’S CLASS ACTION ALLEGATIONS ..................................... 57
COUNT I For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants ........................................ 60
COUNT II For Violations of Section 20(a) of the Exchange Act Against Defendants Munro and Petraglia ................................................................... 65
PRAYER FOR RELIEF .......................................................................................... 66
JURY DEMAND ..................................................................................................... 67
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By and through its undersigned counsel, Lead Plaintiff Charles R. Gilbert, Jr.
(“Plaintiff”), residing at 301 Bristol Downs Drive, Gaithersburg, Maryland 20877-
4304, alleges the following against Defendants InterCloud Systems, Inc.
(“InterCloud” or the “Company”), Mark E. Munro (“Munro”), Thomas Meyer
(“Meyer), John Mylant (“Mylant”), CSIR Group, LLC (“CSIR”), and Christine
Petraglia (“Petraglia”) (collectively, “Defendants”), upon personal knowledge as to
those allegations concerning Plaintiff and, as to all other matters, upon the
investigation of counsel, which included, without limitation: (a) review and analysis
of public filings made by InterCloud and other related parties and non-parties with the
U.S. Securities and Exchange Commission (“SEC”); (b) review and analysis of press
releases and other publications disseminated by certain of the Defendants and other
related non-parties; (c) review of news articles and shareholder communications; (d)
review of other publicly available information concerning Defendants and related non-
parties; (e) consultation with experts; and (f) interviews with factual sources,
including industry participants.
I. SUMMARY OF THE ACTION
1. This is a federal securities class action against Defendants for violations
of the federal securities laws. Plaintiff brings this action under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of
himself and all persons or entities who purchased or acquired shares of InterCloud
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(the “Class”) between December 3, 2013 and March 27, 2014, inclusive (the “Class
Period”). Plaintiff alleges that, during the Class Period, Defendants engaged in a
fraudulent scheme to artificially inflate the Company’s stock price by disseminating
false and misleading analyst reports into the market concerning the Company’s
growth prospects, which were actually paid for by the Company, and first approved by
InterCloud’s management, without investors’ knowledge. As a result of this fraud, as
more fully described below, shareholders suffered millions of dollars in losses.
2. InterCloud describes itself as a global single-source provider of value-
added services for both corporate enterprises and service providers offering cloud and
managed services, professional consulting services, and voice, data, and optical
solutions to assist its customers in meeting their changing technology demands. The
Company’s stock is listed on the NASDAQ Stock Market (“NASDAQ”) under the
ticker symbol “ICLD.”
3. The Company having just moved from over-the-counter trading to the
NASDAQ on October 31, 2013, Defendants set out to drive up InterCloud’s share
price through an aggressive promotional campaign. Using CSIR as a paid
intermediary, InterCloud commissioned numerous bullish articles enthusiastically
touting InterCloud stock based on the Company’s climbing revenues and “strong
growth potential” under Defendant Munro’s leadership. InterCloud’s paid shills
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promoted “5 Reasons To Buy InterCloud Systems Right Now,” and told investors to
“Watch How InterCloud Grows Under The Guidance Of Mark Munro.”
4. Through this practice, Defendants were able to manipulate the market to
create the perception of widespread excitement for significant growth at InterCloud.
Throughout the Class Period, Defendants made numerous false and misleading
statements in the form of purportedly independent analyst research reports posted on
investor websites such as seekingalpha.com and wallstcheatsheet.com . At least three
such articles were published by three different authors during the Class Period.
Defendants’ promotional campaign was incredibly successful; InterCloud’s share
price soared to over $19 per share in late December 2013, more than quadruple its
NASDAQ opening price of $4.00 on October 31, 2013.
5. However, Defendants failed to disclose that: (1) these bullish articles
touting InterCloud stock were actually commissioned by the Company using its paid
promoter, CSIR; (2) CSIR had actively recruited freelance writers to pen these
positive articles on InterCloud to be disguised as independent research; (3)
InterCloud’s management, including Defendant Munro, reviewed and approved the
articles prior to their publication; and (4) the freelance writers were paid hundreds of
dollars per article by CSIR and InterCloud to hype the Company’s stock. As a result
of the foregoing omissions, Defendants’ pro-InterCloud articles published during the
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Class Period were materially false and misleading and therefore violative of the
federal securities laws.
6. The truth about Defendants’ fraudulent, manipulative promotional
scheme was later revealed through a series of partial revelations in March 2014. The
first such disclosure occurred on March 13, 2014 when an analyst by the name of
Richard Pearson first exposed the paid promotions in a report entitled, “Behind The
Scenes With Dream Team, CytRx And Galena” posted on seekingalpha.com .
Pearson’s exposé revealed that stock promoter the DreamTeamGroup (“DreamTeam”)
had attempted to hire him to write paid promotional articles on certain companies
without disclosing such payment.
7. Pearson’s report provided detailed evidentiary support, including email
exchanges, indicating that management of the two target companies were intimately
involved in reviewing and editing the paid articles on their own stock, and were well
aware that the articles failed to disclose this paid marketing relationship. Pearson
revealed that DreamTeam’s promotional campaigns used multiple aliases on third-
party investor websites like seekingalpha.com , sometimes even pretending to be hedge
fund managers touting the stock. Significant to Defendants’ fraud, some of the aliases
revealed by Pearson to be DreamTeam’s paid shills were the same people who had
promoted InterCloud stock during the Class Period on the same investor websites.
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8. As a result of this revelation that the same individuals pumping
InterCloud stock during the Class Period had been implicated in a fraudulent
promotional scheme concerning other stocks, InterCloud’s share price sunk 9%, from
a close of $13.10 on March 12, 2014 to a close of $11.91 on March 13, 2014, on
abnormally heavy trading volume nearly five times greater than the previous ten
days’ average.
9. Then, only days later, after trading hours on March 17, 2014, journalist
Roddy Boyd published his own report highly critical of InterCloud. Entitled “The
Copper Archipelago: InterCloud,” this exposé further laid bare that overly positive
articles bullish on InterCloud during the Class Period were actually paid promotions
emanating directly from Defendants. On this news, shares of InterCloud declined
$1.28 per share, or nearly 11%, to close at $10.59 per share on March 18, 2014 on
unusually heavy volume, resulting in millions in investor losses.
10. Next, the Rosen Law Firm announced on March 21, 2014 that it was
investigating potential securities fraud claims against InterCloud stemming from its
paid promotional scheme. This news that Defendants’ fraud may result in significant
financial exposure and/or SEC scrutiny sent investors scrambling, causing InterCloud
shares to plummet nearly 29% from a close of $10.33 on March 20, 2014 to $7.35 on
March 21, 2014, resulting in millions more in investor losses. Trading volume on
March 21, 2014 was nearly ten times greater than the previous day’s volume.
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11. Further, on March 27, 2014, Richard Pearson published a follow-up
report to his original March 13th exposé. This follow-up newly disclosed that a
representative from CSIR had contacted him directly to author flattering articles on
InterCloud for a flat fee. And, prior to publishing, Pearson’s articles would first be
reviewed by InterCloud management, including Defendant Munro. On this news
directly linking, for the first time, InterCloud’s management with the paid promotional
activities, the Company’s share price tumbled more than 10% on heavy trading
volume, to a close of $6.60 on March 27, 2014 from a close of $7.38 the day before.
12. As a result of Defendants’ wrongful Class Period acts and omissions, and
the precipitous decline in the market value of the Company’s securities following
these revelations of the truth, Plaintiff and other Class members have suffered
significant losses and damages.
II. JURISDICTION AND VENUE
13. The claims asserted herein arise under and pursuant to Sections 10(b) and
20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5
promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5(a), (b), and/or (c). This
Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
§1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.
14. Venue is proper in this District pursuant to Section 27 of the Exchange
Act (15 U.S.C. §78aa), and 28 U.S.C. §1391(b). Many of the false and misleading
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statements and omissions were made in or issued from this District. InterCloud’s
principal executive offices are located at 1030 Broad Street, Shrewsbury, New Jersey
07702, and many of the acts and transactions giving rise to the violations of law
complained of occurred in this District.
15. In connection with the challenged conduct, Defendants, directly or
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 the national securities markets.
III. PARTIES
A. Plaintiff
16. Plaintiff was appointed to serve as Lead Plaintiff in this action by Order
of this Court dated November 5, 2014 [Dkt. No. 36]. The appointment was affirmed
by Order dated December 15, 2014 [Dkt. No. 43]. As shown in the certification filed
with the Court on May 27, 2014 [Dkt. No. 12-4] and incorporated herein, Plaintiff
purchased InterCloud common stock at artificially inflated prices during the Class
Period and suffered an economic loss when true facts about the Company’s fraudulent
practices were disclosed, and the stock price resultantly declined.
B. Defendants
17. Defendant InterCloud is a Delaware corporation with principal executive
offices located in Shrewsbury, New Jersey. InterCloud bills itself as a global single-
source provider of value-added services for both corporate enterprises and service
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providers offering cloud and managed services, professional consulting services and
voice, data, and optical solutions to assist its customers in meeting their changing
technology demands.
18. Defendant Munro is, and at all relevant times was, InterCloud’s Chief
Executive Officer (“CEO”) and Chairman of the Board. He reviewed and approved
the bullish articles on InterCloud stock commissioned by CSIR during the Class
Period at InterCloud’s behest.
19. Defendant Meyer is a freelance writer who, during the Class Period,
acted as a paid promoter for InterCloud working closely with Defendant CSIR to
prepare and publish promotional articles enthusiastically touting InterCloud stock,
with approval from InterCloud’s management, including Defendant Munro, without
disclosing his receipt of payment for the articles.
20. Defendant Mylant is a freelance writer who, during the Class Period,
acted as a paid promoter for InterCloud working closely with Defendant CSIR to
prepare and publish promotional articles enthusiastically touting InterCloud stock,
with approval from InterCloud’s management, including Defendant Munro, without
disclosing his receipt of payment for the articles.
21. Defendant CSIR is a Manhattan-based investor relations firm hired by
InterCloud. During the Class Period, CSIR worked in concert with Defendants
InterCloud and Munro to hire freelance writers such as Defendants Meyer and Mylant
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to prepare and publish promotional articles enthusiastically touting InterCloud stock,
which were first reviewed and approved by InterCloud management, including
Defendant Munro, with CSIR serving as intermediary between the writers and
InterCloud.
22. Defendant Petraglia is, and at all relevant times was, the founder and
principal of CSIR. According to CSIR literature, Defendant Petraglia boasts 18 years
of financial services experience in client relations, sales, marketing, and investor
relations. During the Class Period, she worked in concert with Defendants InterCloud
and Munro and facilitated CSIR’s hiring of freelance writers such as Defendants
Meyer and Mylant to prepare and publish promotional articles enthusiastically touting
InterCloud stock, which were first reviewed and approved by InterCloud management,
including Defendant Munro, but failed to disclose such review or the writers’ payment
for their articles.
23. Defendant Munro is liable as a direct participant in the wrongs
complained of herein. In addition, Defendant Munro, by reason of his status as a
senior executive officer, was a “controlling person” within the meaning of Section
20(a) of the Exchange Act and had the power and influence to cause InterCloud to
engage in the unlawful conduct complained of herein. Because of his position of
control, Defendant Munro was able to, and did, directly or indirectly, control the
conduct of InterCloud’s business.
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24. Defendant Petraglia is liable as a direct participant in the wrongs
complained of herein. In addition, Defendant Petraglia, by reason of her status as a
senior executive officer, was a “controlling person” within the meaning of Section
20(a) of the Exchange Act and had the power and influence to cause CSIR to engage
in the unlawful conduct complained of herein. Because of her position of control,
Defendant Petraglia was able to, and did, directly or indirectly, control the conduct of
CSIR’s business.
25. Defendants, individually and collectively, participated in the drafting,
preparation, and/or approval of the various articles, reports and other communications
complained of herein and were aware of, or recklessly disregarded, the misstatements
contained therein and omissions therefrom, and were aware of their materially false
and misleading nature.
26. Defendants Munro and Petraglia, both individually and collectively,
because of their positions of control and authority as officers of their respective
companies, were able to, and did, control the content of the various articles, reports
and other communications complained of herein. Each Defendant was provided with
copies of the documents alleged herein to be misleading prior to or shortly after their
issuance and/or had the ability and/or opportunity to prevent their issuance or cause
them to be corrected. Accordingly, Defendants are responsible for the accuracy of the
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public reports and releases detailed herein and are therefore primarily liable for the
representations contained therein.
27. Each of the above officers of InterCloud and CSIR, by virtue of his or her
high-level position with his or her company, directly participated in the management
of that company, was directly involved in the day-to-day operations of that company
at the highest levels, and was privy to confidential proprietary information concerning
the Company and its business, operations, and financial condition, as alleged herein.
These Defendants were involved in drafting, producing, reviewing, and/or
disseminating the false and misleading statements and information alleged herein,
were aware, or recklessly disregarded, that these false and misleading statements were
being issued regarding the Company and omitted material adverse facts regarding the
Company, and approved or ratified these statements and failed to disclose these facts,
in violation of the federal securities laws.
28. Since InterCloud was a publicly-traded company whose common stock
was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is,
traded on the NASDAQ and governed by the federal securities laws, Defendants had a
duty to promptly disseminate accurate and truthful information with respect to
InterCloud’s financial condition and performance, growth, operations, financial
statements, business, products, markets, management, earnings, and present and future
business prospects, and to correct any previously issued statements that had become
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materially misleading or untrue so that the market price of InterCloud’s securities
would be based upon truthful and accurate information. Defendants’
misrepresentations and omissions during the Class Period violated these specific
requirements and obligations.
29. Defendants are liable as participants in a fraudulent scheme and course of
conduct that operated as a fraud or deceit on purchasers of InterCloud’s publicly
traded securities by disseminating materially false and misleading statements and/or
concealing material adverse facts. The scheme deceived the investing public
regarding the Company’s business prospects and the intrinsic value of InterCloud
common stock, causing Plaintiff and other members of the Class to purchase
InterCloud common stock at artificially inflated prices.
30. Defendants are liable for: (i) making false and misleading statements;
and/or (ii) failing to disclose adverse facts known to them about InterCloud.
Defendants’ fraudulent scheme and course of business that operated as a fraud or
deceit on purchasers of InterCloud common stock was a success, as it: (i) deceived the
investing public regarding the Company’s business prospects; (ii) artificially inflated
the price of InterCloud common stock; and (iii) caused Plaintiff and other members of
the Class to purchase InterCloud common stock at artificially inflated prices.
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IV. SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS
A. Background of the Company
31. InterCloud bills itself as a single-source provider of end-to-end
information technology (“IT”) and next-generation network solutions to the
telecommunications service provider and corporate enterprise markets through cloud
platforms and professional services. The Company offers cloud and managed
services, professional consulting and staffing services, and voice, data and optical
solutions to assist its customers in meeting their changing technology demands.
InterCloud’s engineering, design, installation, and maintenance services support the
build-out and operation of some of the most advanced enterprise, fiber optics,
ethernet, and wireless networks.
32. Though the Company was incorporated in 1999, it functioned as a
development stage company with limited activities for the next 10 years. Then, in
January 2010, InterCloud acquired Digital Comm., Inc., which specialized in specialty
contracting services primarily in the installation of fiber optic telephone cable.
InterCloud’s operations thus picked up, and through September 2012, substantially all
of the Company’s revenues derived from such specialty contracting services. As a
result of subsequent acquisitions, InterCloud has since diversified its revenue sources
to include telecommunications staffing services and additional specialty contracting
services.
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B. The Undisclosed Paid Promotional Scheme
33. The Company’s stock traded over-the-counter on the OTCQB
Marketplace until its initial public offering on the NASDAQ on October 31, 2013.
With newfound exposure moving from the pink sheets to the NASDAQ, and coming
off its most successful quarter to date, Defendants immediately sought to make
InterCloud a more recognizable name among investors.
34. Beginning no later than December 2013, at InterCloud’s direction,
Defendant CSIR undertook a campaign to publicly tout the Company’s stock to
artificially inflate InterCloud’s share price. This promotional campaign, which
included numerous published articles (the “Articles”) on third-party investor websites
like seekingalpha.com and wallstcheatsheet.com , 1 was indeed successful.
InterCloud’s stock price soared to a high of $19.39 on December 31, 2013 just weeks
after opening on the NASDAQ at approximately $4 per share. The Articles
commissioned by Defendants caused the price of the Company’s stock to more than
quadruple during the Class Period.
1 When Defendants’ fraudulent promotional scheme was ultimately revealed beginning in March 2014, as discussed infra, these third-party websites summarily removed the Articles in question for violating the websites’ terms of use by not disclosing the authors’ paid relationships with the subjects of their Articles. While Plaintiffs were able to obtain copies of certain of these Articles (redacted) from outside sources, they believe still more were published during the Class Period (but subsequently taken down by the host websites). Armed with the privileges of a formal discovery process, Plaintiffs are confident they will uncover all pro-InterCloud Articles published during the Class Period.
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35. Defendants’ illicit promotional campaign was designed to increase
shareholder value and raise visibility for the Company, which it succeeded in doing.
However, the Articles failed to disclose that they were penned by paid promoters
under Defendants’ direction with Defendants’ approval, or that any financial
relationship existed between the Articles’ authors and the Company.
1. “5 Reasons To Buy InterCloud Systems Right Now,” Published on December 3, 2013
36. The Class Period begins on December 3, 2013 when an Article entitled
“5 Reasons To Buy InterCloud Systems Right Now,” authored by Defendant Meyer
under the pseudonym “Equity Options Guru,” 2 was posted on seekingalpha.com . This
Article boasted of the Company’s growth, noting InterCloud’s recent announcement
of “record third quarter earnings” and promising that “[a] look at the revenue growth
pattern over the past 3 years should really make investors smile.” “The quick and
steady growth of InterCloud Systems has been as strong as any company.”
37. Defendant Meyer’s Article praised InterCloud’s recent acquisitions,
which “should pave the way for one of InterCloud System’s main goals which is to
2 Two Class Period Articles on InterCloud posted on seekingalpha.com were penned by “Kingmaker” and “Equity Options Guru.” As discussed infra , Defendant Meyer published articles under each of these pseudonyms to create the false impression that multiple analysts were excited about the stock of whichever company he was then promoting. See ¶¶75-76.
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expand internationally.” Further, “successful international expansion could help
InterCloud Systems generate revenue in the hundreds of millions.”
38. Among the noted advantages of InterCloud’s cloud services, this Article
highlighted that the Company’s InterCloudVm cloud services platform “will offer
several competitive advantages which should help to further drive revenue growth in
the future.” Those competitive advantages included cost savings, increased speed,
improved information security, and decreased deployment time.
39. Defendant Meyer’s Article also highlighted InterCloud’s “soaring share
price” and listed the advantages of ICLD stock having recently moved from the
OTCQB to the NASDAQ exchange: (i) greater liquidity for investors; (ii) better
execution fills for investors; and (iii) allowing institutional investors to enter the
market for ICLD shares. Meyer added, “Now that InterCloud Systems has reached a
more appropriate valuation of roughly $50 million, investors need to determine
whether it is undervalued at today’s price. I believe that it is.”
40. Comparing revenue growth rates for the first three quarters of 2013 and
estimating revenues for the fourth quarter, Defendant Meyer’s Article went on to state
that InterCloud “is currently valued at less ($50 million) than what it is expected to
generate in total sales ($61.2 million). At the very least, InterCloud Systems should
be trading at 2x price/sales ratio. That would value the company at $122.4 million
and indicate a trading price of $19 per share ($122.4 million valuation/shares
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outstanding of 6.41 million).” The Article continued, “If InterCloud Systems can
produce a strong 4th quarter number, I expect that shares will begin trading closer to
the company’s true valuation.”
41. The Article then concluded, “InterCloud Systems appears to be making
all the right moves. The company has been able to generate consistent and solid
revenue growth while turning in its largest net income during the most recent quarter.
By combining an effective corporate growth plan with a state of the art technology
platform, it appears that InterCloud Systems shares may be headed much higher over
the next several months.”
42. As a result of this bullish Article, InterCloud stock rallied strongly on
December 3, 2013, from an opening share price of $7.63 to a closing price of $10.40,
representing a gain of over 36% .
43. However, Defendant Meyer’s Article failed to disclose that he was being
paid by CSIR and InterCloud to offer his enthusiastic opinions about the Company’s
stock. Defendant Meyer similarly failed to disclose that InterCloud management,
including Defendant Munro, was given the opportunity to review, edit, and approve
his Article before it was submitted for publication on seekingalpha.com . In short,
Defendant Meyer failed to disclose that his purportedly independent research on
InterCloud was, in actuality, a paid advertisement for the Company. See infra ¶¶74-
91.
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44. Defendant Meyer’s failure to make these disclosures violated the Terms
of Use of seekingalpha.com . Indeed, seekingalpha.com demands that all “User
Submissions” (such as the above Article posted by Defendant Meyer) abide by the
following disclosure rules:
• You may not write about a stock with the intention to boost or reduce the stock’s price and sell (or buy) the stock into the resulting strength or weakness.
• Abide by the following conflict of interest rule: You will disclose any material relationships with companies whose stocks you write about in a User Submission or parties that stand to gain in any way from the viewpoint you are outlining. Examples: You must disclose if you are employed by a company whose stock you are writing about; perform consulting for a company you write about; receive paid advertising revenue or any other form of sponsorship fee from a company you write about. This applies to narrow asset classes as well. For example, if you are paid to promote a gold dealer, that must be disclosed in any User Submission about gold.
• If you choose an alias, be responsible for all statements made and acts or omissions that occur by use of your alias.
45. Further, under seekingalpha.com ’s Terms of Use, users like Defendant
Meyer may not :
• Post or transmit any Content that you either know or should know is false, deceptive or misleading, or misrepresent or deceive others as to the source, accuracy, integrity or completeness of any comment you post.
• By use of your alias or in any comment, impersonate any person or entity, falsely or deceptively state, infer or otherwise misrepresent your affiliation with or connection to any person or entity .
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• Post or transmit any advertising, promotional materials , so called “chain letters,” “pyramid” or other schemes or invitations to participate in these or any other form of solicitation or promotion.
• Violate any local, state, national or international law, regulation or order of any court, including but not limited to regulations of the U.S. Securities and Exchange Commission , any rules of any securities exchange, including without limitation, the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market.
46. Defendants owed a duty to InterCloud investors to disclose that
Defendant Meyer’s Article was actually a paid promotion for InterCloud, written at
the Company’s behest and paid for by CSIR and InterCloud. Defendants also owed a
duty to investors to disclose that Defendant Meyer’s purportedly independent analysis
was actually reviewed, edited, and approved by CSIR and InterCloud management,
including Defendant Munro.
47. Defendant Meyer’s December 3, 2013 Article, which was also reviewed
and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was thus false and
misleading for omitting the above disclosures. Additionally and independently,
Defendants acted in concert to perpetuate a fraudulent scheme to violate a standard set
by Section 17(b) of the Securities Act of 1933 (“Securities Act”), see infra ¶¶92-96,
promote the Company’s stock under the guise of independent research and analysis,
and thus manipulate the market for InterCloud stock to Plaintiff’s and the Class’s
detriment.
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2. “Watch How InterCloud Grows Under The Guidance Of Mark Munro,” Published on December 17, 2013
48. Two weeks later, on December 17, 2013, another Article was posted on
seekingalpha.com entitled “Watch How InterCloud Grows Under The Guidance Of
Mark Munro.” This Article, written by Defendant Mylant, touted Munro’s talents and
expressed great confidence in InterCloud with Defendant Munro at the helm. “Mark
Munro has been in the IT and telecom industry since 1985 and has been building and
investing in the IT, telecom and cloud venues since 1990. When he took over the
company in 2012[,] he saw that the opportunity for growth was in the cloud. Under
his guidance, I see great opportunity for growth out of InterCloud (ICLD).”
49. In reference to a recently announced acquisition by InterCloud,
Defendant Mylant asserted it “just goes to prove how Mr. Munro will be able to guide
this company and continue to help it prosper.” This was “a significant acquisition for
the company that was made possible by the sale of $11.625 million aggregate
principal amount of 12% convertible debentures. Under the guidance of Mr. Munro,
the company continues to grow and bring value to shareholders.”
50. Defendant Mylant’s Article continued, “The Cloud, according to
management, should be the company’s greatest percent of growth in the future. The
company does not resell other company’s cloud platforms, it has its own. While many
cloud providers tend to look like ‘rebranded data storage companies,’ InterCloud is
transitioning into a ‘cloud integration company’ that will custom design and manage
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private cloud networks, manage large telecom networks as well as service legacy IT
networks for enterprise clients. The company does cable installation for its WiFi and
DAS customers, but it is not the bread-and-butter of its revenue base. It will be
leveraging the relationships it has with service providers and large enterprises in
network management with the intent to transfer people to its own cloud platform.”
51. “Under Mark Munro’s guidance, the company has started to see the
growth it anticipates. The news that revenue increased to $43 million for the first nine
months of 2013 and announcing net income of $1.3M in Q03 sent the stock soaring.
If the company continues to perform like it has under Mr. Munro, I believe that it’s
possible to surpass the $60 million in revenue by year end. The company’s larger
clients tend to spend more of their money in the latter half of the year and a larger
piece of the company’s revenue has traditionally come in the fourth quarter.”
52. Defendant Mylant’s Article further highlighted, “The company will
continue to grow in the cloud space. Even though it is growing at 20% organically in
the first 9 months of 2013, the company expects to continue to grow. At that rate it
will also look for acquisitions with the intent to give themselves a broader geographic
presence and additional distribution capabilities for cloud and managed services.”
53. Addressing recent volatility in InterCloud’s share price, Defendant
Mylant shrugged it off as “reactionary moves” and assured it was “safe to say the
stock is back in the range that it’s used to trading. From a historical range perspective
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I believe the stock is right where it should be. Can Mr. Munro raise the value of the
stock from here? As I have already mentioned earlier, I believe the answer to this
question is yes. Investors can observe positive reaction to the announcement of the
acquisition on Friday, December 13th, as it significantly increases the revenue on a
yearly basis and is immediately accretive to earnings.” Moreover, “[a]s the company
continues to grow, I am watching it take steps to stay focused on shareholder value,
not growth at the expense of its shareholders.”
54. Defendant Mylant’s Article also noted, “While the company increased
revenue by 80% year-over-year, it also increased debt by 100%. It does not end here
though. The company raised $8 million in its October public offering and has been
chopping off debt since its September financials.” Further, “[s]ince the end of the
third quarter, the company has been able to eliminate nearly $10 million in liabilities
while raising more than $7.7 million in the public capital markets. This has opened up
the door for the company to grow its operating divisions.”
55. This Article concluded, “ If investors are looking for a company to invest
in the long-term for value and growth, I believe InterCloud could make a good
candidate. I believe this because I believe the CEO, Mark Munro, has the know-how
and ability to guide this company into a much larger and profitable entity. My words
are not merely speculation. The numbers behind the company since he has taken over
speak for themselves.”
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56. As a result of Defendant Mylant’s bullish Article posted after the market
closed on December 17, 2013, InterCloud stock jumped to $10.46 per share on
December 18, 2013 on heavy trading volume, an increase of over 5% from the
previous day’s close of $9.89.
57. Moreover, upon information and belief, Defendant Mylant’s December
17, 2013 Article also assured investors of the following:
I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
58. The foregoing assurance violated seekingalpha.com ’s Terms of Use, see
supra ¶¶44-45, 3 and was materially false and misleading because, in reality,
Defendant Mylant was being paid by CSIR and InterCloud to enthusiastically tout the
Company’s stock. Further, Defendant Mylant failed to disclose that InterCloud
management, including Defendant Munro, was given the opportunity to review, edit,
and approve his Article before it was submitted for publication on seekingalpha.com .
In short, Defendant Mylant falsely represented that his research and conclusions on
3 To be sure, Defendant Mylant’s December 17, 2013 Article is no longer accessible on seekingalpha.com because, according to the site, all of Mylant’s “articles have been removed from Seeking Alpha due to a Terms of Use violation.” See John Mylant, Watch How InterCloud Grows Under The Guidance Of Mark Munro , Seeking Alpha (Dec. 17, 2013, 4:01 PM), http://seekingalpha.com/article/1903661-watch-how-intercloud-grows-under-the-guidance-of-mark-munro.
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InterCloud were his own when, in fact, his December 17, 2013 Article was nothing
more than a paid advertisement for the Company. See infra ¶¶74-91.
59. Defendants owed a duty to InterCloud investors to disclose that
Defendant Mylant’s Article was actually a paid promotion for InterCloud, written at
the Company’s behest and paid for by CSIR and InterCloud. Defendants also owed a
duty to investors to disclose that Defendant Mylant’s supposedly independent analysis
was actually reviewed, edited, and approved by CSIR and InterCloud management,
including Defendant Munro, prior to publication.
60. Defendant Mylant’s December 17, 2013 Article, which was also
reviewed and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was
thus false and misleading for omitting the above disclosures. Additionally and
independently, Defendants acted in concert to perpetuate a fraudulent scheme to
violate a standard set by Section 17(b) of the Securities Act, see infra ¶¶92-96,
promote the Company’s stock under the guise of independent research and analysis,
and thus manipulate the market for InterCloud stock to Plaintiff’s and the Class’s
detriment.
3. “InterCloud Systems: A Cloud Integrator With Strong Growth Potential,” Published on January 13, 2014
61. Similarly, on January 13, 2014, an Article entitled “InterCloud Systems:
A Cloud Integrator With Strong Growth Potential,” authored by “Kingmaker” –
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another of Defendant Meyer’s pennames ( see supra note 2) – was posted on
seekingalpha.com . In that Article, InterCloud stock was touted as a small-cap stock
that has “the ability to generate outsized returns over the coming months and years.”
This was because “[t]he company has made several important announcements and the
marketplace has rewarded InterCloud Systems for its foresight.”
62. Defendant Meyer’s Article described InterCloud as “operating in one of
the hottest areas of the market which is poised for significant growth in the coming
years. The shares have already begun to participate in a rally that was long overdue.
Shares of InterCloud Systems have appreciated by nearly 350% since the beginning of
November . . . . That performance made InterCloud Systems one of the hottest and
best performing stocks of 2013. But now it’s time to look to the future to see if shares
will continue their rapid ascent. I believe they will.”
63. Advising investors in small-cap technology companies to pay attention to
those companies’ earnings growth, strategy, and technology, Defendant Meyer’s
Article touted: “InterCloud Systems appears to be firing on all 3 cylinders.” First, the
Company’s reported third quarter 2013 “earnings were so spectacular that the share
price soared by more than 250% during the following trading session.” Reported total
revenue of $16.2 million “represented a 448% year-over-year increase. The growth
occurred because of organic growth and strategic acquisitions. The company also had
a stellar performance because of its gross profit and net income numbers.”
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64. Additionally, “[t]he company appears to be doing what is necessary for
increasing revenue growth while minimizing cost. This has led to a positive net
income which all investors will be sure to take notice of. Because of the company’s
market capitalization and funding needs, it’s also extremely important to take a look at
the company’s balance sheet, particularly the company’s cash balance. As of
September 30, 2013, InterCloud Systems had approximately $3.4 million in available
cash.”
65. Regarding liabilities, Defendant Meyer’s Article noted, “It’s important to
note that the company made an importance [sic] announcement regarding its balance
sheet on January 8, 2014. InterCloud announced that it had reduced its liabilities by
approximately $7.2 million as of the end of 2013. The reduction in liabilities
included” retiring preferred stock, paying down a $1.8 million promissory note, and
repayment of $1.8 million of principal. “Because of the growing revenue and rising
share price, it appears that InterCloud Systems will continue to be able to reduce
liabilities which will in turn help the company to continue minimizing its costs.”
66. Second, “[i]n addition to the phenomenal earnings growth shown thus
far, InterCloud Systems is also an ideal investment because of its strategy.” Third,
“[i]n addition to a growing revenue stream and a successful growth strategy,
InterCloud Systems also has the added benefit of being in an incredibly hot niche
within the technology sector called cloud.” With the cloud services market expected
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to grow in the coming years, “[i]nvestors might be asking, ‘Cloud growth is expected
to increase but why will InterCloud benefit from that?’ The answer is simple.
InterCloud’s design has several significant advantages . . . .”
67. On the topic of risks, Defendant Meyer’s Article focuses on when to
invest, not whether : “It’s clear that InterCloud Systems appears to be on the right
path. But traders and investors should be aware of the risks. Given the rising
revenue, net income growth, and adequate cash balance, dilution doesn’t appear to be
a major concern. The concern I would have would be deciding on an appropriate
entry point for an investment. Given the rapid rise in valuation, investors may be
worried about an ill-timed investment. To combat that worry, investors may want to
consider scaling into a position.”
68. The Article concluded, “InterCloud Systems appears to be an extremely
promising small-cap technology company. Given that the stock market is at an all-
time high, investors need to think outside the box to identify companies that will
outperform. InterCloud Systems appears to be such an opportunity. Because of its
growing revenues, its unique strategy, and a hot technology niche, investors may want
to consider an investment in this company.”
69. InterCloud’s share price soared following publication of Defendant
Meyer’s overly confident Article. After closing at $15.35 on January 13, 2014,
InterCloud stock shot up to $17.03 on January 14, 2014, a nearly 11% increase on
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extremely heavy trading volume. The next day, January 15, 2014, InterCloud stock
continued to rise to $18.13 per share on heavy trading volume. This two-day rally
amounted to an 18% gain for InterCloud stock.
70. Additionally, upon information and belief, in his January 13, 2014
Article, Defendant Meyer published a blatantly false assurance of his own
independence from InterCloud:
I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
71. The foregoing assurance violated seekingalpha.com ’s Terms of Use, see
supra ¶¶44-45, and was materially false and misleading because, in reality, Defendant
Meyer was being paid by CSIR and InterCloud to eagerly hype the Company’s stock.
Further, Defendant Meyer failed to disclose that InterCloud management, including
Defendant Munro, was given the opportunity to review, edit, and approve his Article
before it was submitted for publication on seekingalpha.com . In short, Defendant
Meyer falsely represented that his research and conclusions on InterCloud were his
own when, in fact, his January 13, 2014 Article was nothing more than a paid
advertisement for the Company. See infra ¶¶74-91.
72. Defendants owed a duty to InterCloud investors to disclose that
Defendant Meyer’s Article was actually a paid promotion for InterCloud, written at
the Company’s behest and paid for by CSIR and InterCloud. Defendants also owed a
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duty to investors to disclose that Defendant Meyer’s purportedly independent analysis
was actually reviewed, edited, and approved by CSIR and InterCloud management,
including Defendant Munro, prior to publication.
73. Defendant Meyer’s January 13, 2014 Article, which was also reviewed
and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was thus false and
misleading for omitting the above disclosures. Additionally and independently,
Defendants acted in concert to perpetuate a fraudulent scheme to violate a standard set
by Section 17(b) of the Securities Act, see infra ¶¶92-96, promote the Company’s
stock under the guise of independent research and analysis, and thus manipulate the
market for InterCloud stock to Plaintiff’s and the Class’s detriment.
C. The Truth About Defendants’ Paid Promotional Scheme Is Revealed
74. The truth about Defendants’ paid promotional scheme was revealed
through a series of partial revelations beginning on March 13, 2014 when analyst
Richard Pearson released a report entitled, “Behind The Scenes With Dream Team,
CytRx And Galena” on seekingalpha.com . This report, attached hereto as Exhibit A,
revealed that stock promoter the DreamTeamGroup had attempted to hire him to write
paid promotional articles on such companies as CytRx Corp. (“CytRx”) and Galena
Biopharma, Inc. (“Galena”) without disclosing payment. Pearson’s exposé provided
detailed evidentiary support in the form of emails and attachments indicating that
CytRx and Galena management were intimately involved in reviewing, editing, and
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approving the paid articles on their own stock, and were well aware that the articles
failed to disclose the paid marketing relationship.
75. Significant to InterCloud, Pearson’s report also revealed the aliases used
by DreamTeam’s writers to publish the promotional articles on third-party websites
like seekingalpha.com . At the heart of the scheme was Defendant Meyer, who
Pearson revealed to be DreamTeam’s ringleader of sorts. It was Defendant Meyer
who had first contacted Pearson by email and telephone to write the flattering articles
on CytRx and Galena. Defendant Meyer then introduced Pearson to Defendant
Mylant, who had already published numerous pro-CytRx and pro-Galena articles on
seekingalpha.com and thestreet.com . Defendant Mylant even confirmed to Pearson
that DreamTeam had paid him to write these pro-CytRx and pro-Galena articles, and
that management of each company had signed off on the articles first because “that is
what they are paying for.” Defendant Mylant confided in Pearson that he also wrote
for other investor relations firms as well, and that those firms paid him more
handsomely (a standard rate of $525 per article) than did DreamTeam, which only
offered $300 per article.
76. Pearson’s “Behind the Scenes” exposé further revealed that Defendant
Meyer often wrote under many aliases for multiple websites. Pertinent here,
Defendant Meyer’s pennames on seekingalpha.com were “Wonderful Wizard,”
“Equity Options Guru,” “Kingmaker,” and “Expected Growth.” Of course,
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“Kingmaker” and “Equity Options Guru” also published bullish InterCloud Articles
around the same time during the Class Period. 4
77. On these revelations of a sophisticated network of undisclosed paid
promoters, some of whom had similarly written pro-InterCloud Articles during the
Class Period, InterCloud stock declined $1.19 per share, or over 9%, to close at
$11.91 per share on March 13, 2014 on unusually heavy trading volume.
78. Just days later, on March 17, 2014, the market learned greater detail of
InterCloud’s participation in this recently uncovered fraudulent promotional scheme.
Journalist Roddy Boyd of the Southern Investigative Reporting Foundation published
a report entitled “The Copper Archipelago: InterCloud” highly critical of the
Company. After providing a sordid history of InterCloud’s colorful corporate roots,
Boyd’s report, attached hereto as Exhibit B, outlined Defendants’ more recent
endeavors:
While InterCloud’s never-ending flow of press releases proclaiming its new opportunities in a popular sector have certainly attracted buyers, the company’s use of promoters—a classic sign of a penny stock—has kept the company in the spotlight, after a fashion. For example, last week RedChip Companies released a report that put a $47.10 price target on InterCloud’s shares. Looking and reading every bit as crisply as a standard brokerage report, investors might assume that the industry and
4 Shortly following the publication of Richard Pearson’s exposé, the articles previously posted by the complicit freelancer writers identified by Pearson (such as Defendants Meyer and Mylant) were summarily removed from the investor websites where the articles had originally appeared. Accordingly, most – if not all – of the paid promotional materials authored by these writers are no longer accessible.
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sales metrics cited for a likely 250% gain in share price were coming from someone who had independently weighted these arguments and made a bold call.
But that would be wrong: the Maitland Fla.-based RedChip is an investor relations firm whose strategy centers on putting out “research reports” written for, and approved by, its clients. In other words, they are press releases seeking to appeal to the marginally aware investor (RedChip’s work on behalf of its Chinese clients proved so damaging to investors that they dropped “coverage” of the sector in January 2013.)
For its work on InterCloud, the fine print at the bottom of the 14-page report discloses RedChip was paid 7,500 shares and is being paid a monthly cash fee for six months of investor relations work.
. . . an odd footnote to InterCloud’s promotional gambit was the appearance of a pair of articles on the stock market commentary website Seeking Alpha that touted InterCloud’s prospects, posted in December [2013] and in January [2014]. Authored by John Mylant and a writer using the pseudonym “Kingmaker,” the pieces strongly advocated for InterCloud’s bright prospects because of the talent of its management and the fast growth of the cloud computing sector.
Not disclosed was the fact that the authors[’] unflinching support for InterCloud was also a function of being paid to promote the shares. Last week, Rick Pearson, a West Coast-based investor, posted an article on Seeking Alpha describing how DreamTeamGroup, an investor relations firm ostensibly based in Indianapolis, solicited and paid writers to write enthusiastic, company reviewed and approved articles for release on Seeking Alpha, with the goal being to attract investors and drive up the share price.
According to Pearson, two of the more prolific DreamTeamGroup veiled touts were John Mylant and a man named Tom Meyer, a DreamTeamGroup employee who admitted to using the “Kingmaker” pseudonym.
(Mylant, who contacted the Southern Investigative Reporting Foundation after this story was posted, said he has regularly posted articles and comments on Seeking Alpha and that the opinions he expresses were his own. He acknowledges being contacted by a “Tom”—Mylant did not
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recall his last name or company—who offered to pay him for articles written about companies he was already interested in. He said he is no longer working with “Tom.”)
[Lawrence] Sands [an InterCloud executive at the time] initially denied having heard of or used DreamTeamGroup but after being pressed on the matter said that he has “gotten maybe a few emails from them, stuff that got caught in the ‘spam’ filter.” He continued to argue that it was unlikely InterCloud used DreamTeamGroup for anything, however, since RedChip and a small New York firm, CSIR, were handling the company’s investor relations work. (CSIR founder Christine Petraglia said she had nothing to do with this issue, and said she provided InterCloud standard public- and investor relations services.)
79. Thus, Boyd’s exposé painted a more direct picture of InterCloud’s paid
promotional work with Defendants Mylant and Meyer, confirming: (i) InterCloud’s
relationship with CSIR; and (ii) the Company’s undisclosed financial relationships
with Defendants Mylant and Meyer, who both had stumped for InterCloud stock
throughout the Class Period. On this news, InterCloud stock declined $1.28 per share,
a nearly 11% drop, to close at $10.59 per share on March 18, 2014 on unusually heavy
trading volume.
80. On the heels of these revelations by Richard Pearson and Roddy Boyd,
the Rosen Law Firm announced after trading hours on March 20, 2014 that it was
investigating possible securities fraud claims against InterCloud in connection with its
undisclosed paid promotional scheme. Investors, now recognizing that Defendants’
fraud may result in significant financial exposure and/or SEC scrutiny, scrambled the
next day, sending InterCloud stock plummeting more than 28% , from a close of
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$10.33 on March 20, 2014 to a close of $7.35 on March 21, 2014, on trading volume
nearly ten times the previous day’s volume.
81. Next, the ties between InterCloud, CSIR, Mylant, and Meyer became all
the more clear on March 27, 2014 when Pearson published a follow-up report to his
initial March 13, 2014 revelation. This follow-up, entitled “Behind The Scenes With
Proactive, Inovio And Unilife” and attached hereto as Exhibit C, shed further light on
InterCloud management’s hands-on role in the paid promotional scheme, particularly
that of Defendant Munro. Pearson revealed an email communication from CSIR
representative Herina Ayot, attached hereto as Exhibit D, seeking positive articles on
InterCloud stock to be published on seekingalpha.com . CSIR was looking for Pearson
“to develop convincing arguments around buying the stock,” and Ayot even admitted
that CSIR had “commissioned a few articles on ICLD already that you will find on
Seeking Alpha and Wall Street Cheat Sheet. This will give you an idea of the type of
article we like.”
82. In her email, Ayot promised that CSIR would pay Pearson $500 per
article and, importantly, advised that Defendant Munro would review each article
prior to publication: “I can set up a call with CEO if we need to. If you want to write
it, after you write, we would first send a draft to CEO for review and then have you
publish. We pay $500 to you upon publication. That’s per article.” Pearson’s
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revelation thus provided the first direct link between InterCloud’s management and
the fraudulent promotional scheme.
83. Pearson’s March 27, 2014 report further confirmed Defendants Meyer
and Mylant’s involvement in the fraud:
Tom Meyer told me that he was paying John Mylant to write on Galena and other stocks. John was a prolific author who had written over 800 articles on Seeking Alpha and TheStreet.com . John then confirmed his paid activity in emails to me. John also introduced me to another IR firm he does work for, called CSIR.
*
The articles on InterCloud [published on Seeking Alpha and Wall Street Cheat Sheet, as referenced in Herina Ayot’s email] had been written by Mr. Meyer and Mr. Mylant, both of whom were working for multiple IR firms besides the Dream Team, such as CSIR.
84. On this news, InterCloud stock tumbled to $6.60 per share, a 10% drop
from the previous day’s close of $7.38, on unusually heavy trading volume.
85. Then, on April 2, 2014, Roddy Boyd published his own follow-up to his
“Copper Archipelago” report published weeks earlier on March 17, 2014. In this
April 2nd follow-up, entitled “The Copper Archipelago: Truth, Lies and InterCloud
Systems” and attached hereto as Exhibit E, Boyd noted that “[a] public relations firm
that hires authors to write flattering articles about a client[’]s prospects without
disclosing they are being compensated to do so isn’t just gaming public opinion, but is
running the risk of violating the Rule 17(b) of the Securities Act of 1933, which
mandates disclosure of an economic interest in the promotion or sale of securities.”
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86. Further, in the face of a denial by InterCloud of having ever paid for
stock promotions, Boyd assured that he and the Southern Investigative Reporting
Foundation “stand by our work”:
Make no mistake: regardless of the findings of InterCloud’s former SEC attorney or the forcefulness of its press release, authors were clearly paid to publish favorable articles on InterCloud. Moreover, the shares increased in value during the time of this promotion, and according to the terms of the solicitation, senior management was allowed to see articles prior to publication. The only thing limiting the practice appears to have been the inability to find more authors willing to write on the company.
As it stands, InterCloud’s marketing strategy is already centered on using shareholder capital to whip-up short-term trading interest. Recall how the company retained the RedChip Companies, a Florida-based small-cap stock promotion outfit, paying them in cash and shares. RedChip’s signature move is to put out a lengthy, easy-reading press release constructed to look exactly like a brokerage firm’s report, including an astronomical “target price,” based on grave-seeming metrics that are equal parts surrealist fantasy and comedy.
The CSIR Group, a Manhattan based investor relations firm under contract to InterCloud, is the enterprise behind the practice that InterCloud’s chief executive Mark Munro formally assured investors was—after an internal investigation—inaccurate.
*
This email exchange [referenced above] between Rick Pearson (who used a pseudonym to pose as a prospective author of these articles) and Herina Ayot, an employee of CSIR, is evidence that CSIR was involved in recruiting and paying authors to write favorable, InterCloud-approved articles.
In the most direct terms possible, Ayot laid out to Pearson how CSIR sought an author for an article developing “convincing arguments for
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buying the stock,” one that CEO Mark Munro would review. The author would be paid $500 upon publication of the article.
87. CSIR representative Herina Ayot confirmed to Boyd that “CSIR recruited
and paid writers to write pro-InterCloud articles.” Boyd reported having asked Ayot
about Defendant Petraglia denying such a practice at CSIR. Ayot told Boyd bluntly:
“Christine lied.” Ayot went on to explain, “In [Christine’s] defense, this is Wall
Street and everyone [lies.] We had no idea who you are or why you were asking those
questions; you might have been an investor or someone posing as one. We get
thousands of calls each day. So we lied to get rid of you.”
88. When pressed further on the seriousness of CSIR’s actions on behalf of
InterCloud, Ayot declined to comment on the specifics of CSIR’s work for InterCloud
but reiterated to Boyd: “You need to know that on Wall Street, everyone lies and we
lied to you to protect ourselves.”
89. Defendant Petraglia, CSIR’s founder, later contacted Boyd to clear up the
confusion, telling Boyd her “first instinct was to deny that we did this” when he had
pressed her about CSIR’s practice of paying for promotional articles without
disclosure. She confessed, “I don’t speak to many reporters and I guess I made a
mistake.”
90. More significantly, Defendant Petraglia went on to admit that CSIR had,
in fact, paid for promotional articles on InterCloud: “I never focused on this issue, and
I had never looked at Seeking Alpha before, so I didn’t comprehend that [the lack of
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disclosure] was a problem.” Defendant Petraglia candidly explained to Boyd that it
had been Herina Ayot’s job to line up authors to write articles on behalf of CSIR
clients, including InterCloud, but that CSIR had since ceased doing “that kind of
work” for its clients.
91. Roddy Boyd also spoke with Defendant Mylant for his April 2nd follow-
up report. Mylant confirmed to Boyd that CSIR had approached him to write about
InterCloud and, like Defendant Petraglia, claimed ignorance of the disclosure issues
surrounding his publication practice. Defendant Mylant told Boyd, “I just thought it
was a way for me to earn extra money and write about what was interesting to me.”
D. The Undisclosed Paid Promotions Violated Section 17(b) of the Securities Act of 1933
92. Defendants’ failure to disclose Mylant’s and Meyer’s paid relationship
with CSIR and InterCloud also ran afoul of Section 17(b) of the Securities Act of
1933, further evidencing their Exchange Act Sections 10(b) and 20(a) violations.
93. Section 17(b) – commonly known as the “anti-touting” provision –
provides, in pertinent part, that anyone who advertises a stock, even if he does not
purport to offer the security for sale, must disclose the “consideration received or to be
received, directly or indirectly, from an issuer, underwriter, or dealer, the receipt,
whether past or prospective, of such consideration and the amount thereof.” 15 U.S.C.
§ 77q(b).
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94. This anti-touting provision was enacted, in part, to “meet the evils of the
‘tipster sheet’ as well as articles in newspapers or periodicals that purport to give an
unbiased opinion but which opinions in reality are bought and paid for.” SEC v. Wall
St. Pub. Inst., Inc. , 851 F.2d 365, 376 (D.C. Cir. 1988) (quoting House Committee
Report, H.R. Rep. No. 85, 73d Cong., 1st Sess. 6 (1933)).
95. In an investor bulletin published by the SEC entitled “Microcap Stock: A
Guide for Investors,” the SEC provides information about investment in microcap
stocks and specifically warns of potential fraud, explaining: “Paid Promoters: Some
microcap companies pay stock promoters to recommend or ‘tout’ the microcap stock
in supposedly independent and unbiased investment newsletters, research reports, or
radio and television shows . . . . The federal securities laws require the publications to
disclose who paid them for the promotion, the amount, and the type of payment. But
many fraudsters fail to do so and mislead investors into believing they are receiving
independent advice.”5
96. Here, Defendants’ failure to disclose Meyer and Mylant’s receipt of
compensation for making material statements concerning InterCloud is considered a
material omission, SEC v. Curshen , 372 F. App’x 872, 881 (10th Cir. 2010) (citing
5 This SEC investor bulletin may be found at http://www.sec.gov/investor/pubs/microcapstock.htm.
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Basic, Inc. v. Levinson , 485 U.S. 224, 232 (1988)), thus further supporting their
concomitant violations of Sections 10(b) and 20(a) of the Exchange Act.
E. Defendants Knew of, or Recklessly Disregarded that, the Paid Articles Were False and Misleading and Did Not Contain Appropriate Disclosures
97. Defendants acted with scienter in that they knew or recklessly
disregarded that the bullish InterCloud Articles disseminated by Defendants Meyer
and Mylant were materially false and misleading for their failure to disclose Meyer
and Mylant’s financial relationship with CSIR and InterCloud.
98. Defendant CSIR, by way of Defendant Petraglia and corporate
representative Herina Ayot, has publicly admitted to commissioning flattering Articles
on InterCloud stock that were reviewed and approved by InterCloud management but
failed to disclose that their authors were paid by CSIR and InterCloud.
99. In or around March 2014, Ayot admitted to Richard Pearson that CSIR
had commissioned several pro-InterCloud Articles that appeared on investor websites
seekingalpha.com and wallstcheatsheet.com . Those Articles, later revealed to have
been written by Defendants Meyer and Mylant (and possibly others), concealed the
fact that CSIR and InterCloud had paid the authors to tout InterCloud’s stock. Instead,
the Articles commissioned and published by Defendants were presented exactly as
Defendants wished: as independent research and analysis compiled by investing
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experts who had come to their own conclusions that InterCloud’s stock was both
attractive and undervalued.
100. CSIR, again by way of Ayot, further admitted to Pearson that
InterCloud’s CEO, Defendant Munro, reviewed and approved the commissioned
Articles before they were submitted to seekingalpha.com or wallstcheatsheet.com for
publication. Thus, by CSIR’s own admission, InterCloud enjoyed full editing
discretion over promotional Articles that were published and presented to the
investing public as purportedly independent research and analysis.
101. Defendant Petraglia separately offered the same admissions to journalist
Roddy Boyd in or around April 2014 when she confirmed that CSIR had
commissioned pro-InterCloud Articles that failed to disclose the authors’ financial
relationships with CSIR and InterCloud. Recognizing the impropriety of this
deceptive promotional practice, Defendant Petraglia went on to assure Boyd that CSIR
no longer does “that kind of work” for its clients.
102. Each of the Defendants’ roles in their fraudulent scheme to promote
InterCloud stock – from Defendant Munro atop InterCloud, to Defendant Petraglia
atop CSIR, to Defendants Meyer and Mylant as InterCloud’s paid shills – has been
clearly defined and laid bare by the investigative journalism of Richard Pearson and
Roddy Boyd, both of whom extracted candid but damning admissions from one or
more of the Defendants.
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103. As described above, Pearson’s and Boyd’s exposés meticulously outline
the means by which Defendants defrauded Plaintiff and other InterCloud investors by
way of paid Company promotions intentionally disguised as independent analyst
research. As Defendants Meyer and Mylant’s bullish InterCloud Articles were
separately reviewed and approved by Defendants CSIR, InterCloud, Munro, and
Petraglia before publication, all of the Defendants either knew, or recklessly
disregarded, that the commissioned Articles failed to disclose that they were, in fact,
commissioned, paid for, and edited and approved by Defendants CSIR and
InterCloud.
V. LOSS CAUSATION
104. As detailed throughout and further herein, Defendants’ fraudulent scheme
artificially inflated InterCloud’s stock price by misrepresenting and concealing the
Company’s illicit promotional campaign, including the facts that: (a) InterCloud hired
and paid CSIR to disseminate bullish Articles on the Company to boost InterCloud’s
share price; (b) through CSIR, InterCloud hired and paid third-party authors such as
Defendants Meyer and Mylant to write such bullish Articles; (c) InterCloud
management, including Defendant Munro, reviewed, edited, and approved the Articles
before they were submitted for publication by the authors; (d) the pro-InterCloud
Articles failed to disclose that their authors were being paid by CSIR and InterCloud
to tout the Company; and (e) the pro-InterCloud Articles similarly failed to disclose
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that Defendant Munro and/or other InterCloud executives had reviewed, edited, and
approved the Articles prior to their publication.
105. Defendants’ false and misleading statements and omissions, individually
and collectively, concealed material information on the Company, resulting in
InterCloud’s stock being artificially inflated until, as indicated herein, the relevant
truth about its illicit promotional campaign was revealed. While each of these
misrepresentations and omissions was independently fraudulent, they were all
motivated by Defendants’ desire to artificially inflate InterCloud’s stock price and the
image of its future business growth. These false and misleading statements and
omissions, among others, had the intended effect of preventing the market from
learning the full truth and keeping the Company’s stock price artificially inflated
throughout the Class Period. Indeed, Defendants’ false and misleading statements and
omissions had the intended effect and caused, or were a substantial contributing cause
of InterCloud’s stock trading at artificially inflated levels, reaching as high as $19.39
during the Class Period.
106. The true picture about InterCloud’s fraudulent promotional campaign
was revealed in a series of partial revelations on: (a) March 13, 2014; (b) March 17,
2014; (c) March 20, 2014; and (d) March 27, 2014. These revelations indicated to the
market that Defendants’ prior Class Period statements were false and misleading.
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A. March 13, 2014 Disclosure
107. The truth about InterCloud’s operations began to emerge on March 13,
2014, when analyst Richard Pearson first exposed the paid promotional scheme in a
report entitled, “Behind The Scenes With Dream Team, CytRx And Galena”
published on seekingalpha.com . Pearson’s exposé revealed that stock promoter the
DreamTeamGroup attempted to hire him to write paid promotional articles on certain
companies without disclosing such payment, and that some of the aliases used by
DreamTeam’s gang of paid writers were the same names who had penned similarly
bullish Articles on InterCloud during the Class Period.
108. As a result of this revelation that authors pumping InterCloud stock
during the Class Period had been implicated in a fraudulent paid promotional scheme
to similarly pump other stocks, InterCloud’s stock price declined 9%, from a close of
$13.10 on March 12, 2014 to a close of $11.91 on March 13, 2014, on abnormally
heavy trading volume nearly five times greater than the previous ten days’ average.
The market’s negative reaction to the March 13, 2014 revelation is demonstrated in
the following stock chart:
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Case 3:14-cv-01982-PGS-DEA Document 44 Filed 01/09/15 Page 48 of 72 PageID: 587
2000000
1800000
1600000
1400000
1200000
1000000
800000
U) 600000
400000
200000
0
13.2
13
12.8
12.6
12.4
12.2
12 ° 11.8
11.6
11.4
11.2
— Volume -•- Price
3/12/2014 3/13/2014
Date
109. The rapid decline in InterCloud’s stock price was the direct result of the
nature and extent of the revelations made to investors and the market regarding
InterCloud’s illicit marketing scheme. This decline would have been even more
significant had the March 13, 2014 article disclosed the full extent of Defendants’
undisclosed paid marketing campaign.
110. The timing and magnitude of InterCloud’s stock price decline from
March 12, 2014 through March 13, 2014 negates any inference that the losses suffered
by Plaintiff were caused by changed market conditions, macroeconomic or industry
factors, or Company-specific facts unrelated to Defendants’ fraudulent conduct. This
point is evidenced by the charts below, see infra ¶¶122-123, which demonstrate the
clear divergence of InterCloud’s stock price from the aggregate stock price of its peer
index as the revelations of the truth become known to the market.
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B. March 17, 2014 Disclosure
111. A few days later, on March 17, 2014, journalist Roddy Boyd published a
report after hours entitled “The Copper Archipelago: InterCloud,” which was highly
critical of InterCloud. Boyd’s report revealed that the overly positive Articles bullish
on InterCloud were likely paid promotions emanating directly from Defendants.
112. As a result of the information revealed to the market on March 17, 2014,
InterCloud stock fell $1.28 per share on March 18, 2014, a nearly 11% drop from a
close of $11.87 on March 17, 2014 to a close of $10.59 per share on March 18, 2014,
on unusually heavy volume. The market’s negative reaction to Roddy Boyd’s March
17, 2014 revelations is demonstrated in the following stock chart:
1200000
1000000
800000
600000
400000
200000
0
12
11.5
11 Volume Price
0 10.5
10
9.5 3/17/2014 3/18/2014
Date
113. The rapid decline in InterCloud’s stock price was the direct result of the
nature and extent of the revelations made to investors and the market regarding
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InterCloud’s use of undisclosed paid promoters, which had been concealed or
misrepresented by Defendants’ scheme and misstatements.
114. The timing and magnitude of InterCloud’s stock price decline from
March 17, 2014 through March 18, 2014 negates any inference that the losses suffered
by Plaintiff were caused by changed market conditions, macroeconomic or industry
factors, or Company-specific facts unrelated to Defendants’ fraudulent conduct. This
point is evidenced by the charts below, see infra ¶¶122-123, which demonstrate the
clear divergence of InterCloud’s stock price from the aggregate stock price of its peer
index as the revelation of the truth became known to the market.
C. March 20, 2014 Disclosure
115. On March 20, 2014, on the heels of Richard Pearson’s and Roddy Boyd’s
revelations of Defendants’ illicit undisclosed promotional campaign, the Rosen Law
Firm announced an investigation of potential securities fraud claims against
InterCloud, alleging that insiders had paid outside parties to pump the Company’s
stock. The announcement was issued after trading hours. The investigation alleged
that authors John Mylant and “Kingmaker” had published glowing articles on
seekingalpa.com regarding the Company, which helped InterCloud stock rally from
$2.55 on November 14, 2013 to $18.13 on January 15, 2014, without disclosing that
they were paid to pump the stock. News of the Rosen Law Firm’s investigation was
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published on numerous stock-related websites the following day, March 21, 2014,
including, among others, thestreet.com , crappystocks.com , and marketnewscall.com .
116. As a result of the information revealed to the market on March 20, 2014,
InterCloud stock dropped $2.98 a share, or more than 28%, from a close of $10.33 on
March 20, 2014 to a close of $7.35 on March 21, 2014, on abnormally heavy trading
volume nearly ten times the previous day’s volume. The market’s negative reaction
to the March 20, 2014 revelations is demonstrated in the following stock chart:
4000000
3500000
3000000 C)
2500000
2000000
1500000 U)
1000000
500000
0
11
10
9
8 0 0
7
6
5
Volume -•- Price
3/20/2014 3/21/2014
Date
117. The rapid decline in InterCloud’s stock price was the direct result of the
nature and extent of the revelations made to investors and the market regarding
InterCloud’s illicit undisclosed paid promotional campaign, which had been concealed
or misrepresented by Defendants’ scheme and misstatements.
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118. The timing and magnitude of InterCloud’s stock price decline from
March 20, 2014 through March 21, 2014 negates any inference that the losses suffered
by Plaintiff were caused by changed market conditions, macroeconomic or industry
factors, or Company specific facts unrelated to Defendants’ fraudulent conduct. This
point is evidenced by the charts below, see infra ¶¶122-123, which demonstrate the
clear divergence of InterCloud’s stock price from the aggregate stock price of its peer
index as the revelation of the truth became known to the market.
D. March 27, 2014 Disclosure
119. Then, on March 27, 2014, at 9:45 a.m., a follow-up report written by
Richard Pearson entitled “Behind The Scenes With Proactive, Inovio And Unilife,”
was published on seekingalpha.com revealing that, by Defendants’ own admissions,
CSIR had commissioned paid Articles on InterCloud during the Class Period, and
Defendant Munro had reviewed those Articles prior to their publication. Pearson’s
follow-up report thus provided the first direct link between InterCloud’s management
and the undisclosed paid promotional campaign.
120. As a result of the information revealed to the market on March 27, 2014,
the market cast doubt on the veracity of Defendants’ prior statements, causing
InterCloud stock to sink $0.78 a share, or approximately 10%, from a close of $7.38
on March 26, 2014 to a close of $6.60 on March 27, 2014, on abnormally heavy
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trading volume. The market’s negative reaction to the March 27, 2014 revelations is
demonstrated in the following stock chart:
700000
600000
• 500000 C)
E 400000
300000
Cl) 200000
100000
0
7.6
7.4
7.2
7 12 Volume Price
0 6.8
6.6
6.4
6.2 3/26/2014 3/27/2014
Date
121. The rapid decline in InterCloud’s stock price was the direct result of the
nature and extent of the revelations made to investors and the market regarding
InterCloud’s illicit undisclosed paid promotions, which had been concealed or
misrepresented by Defendants’ scheme and misstatements.
122. The timing and magnitude of InterCloud’s stock price decline from
3/26/2014
March 26, 2014 through March 27, 2014 negates any inference that the losses suffered
by Plaintiff were caused by changed market conditions, macroeconomic or industry
factors, or Company specific facts unrelated to Defendants’ fraudulent conduct. This
point is evidenced by the chart below, which demonstrates the clear divergence of
- - 50 - 50 -
InterCioud Systems (ICLD) vs. NASDAQ Composite (CCMP), NASDAQ Computer (IXK) and PEER (Peer) Index
100
90
-' C) -
80 ! COP -
-
Eu 0 D
60
50
Case 3:14-cv-01982-PGS-DEA Document 44 Filed 01/09/15 Page 54 of 72 PageID: 593
InterCloud’s stock price from the aggregate stock price of its peer index 6 as the
revelation of the truth became known to the market:
$14
$13
$12
) $11 U
w
:
$8
$7
$6
0 0 0 0 0 0 0 a 0 0 P1 N N
- - - - - - - - C4 C4 N a C5 a
6 InterCloud’s peer index is comprised of the following publicly traded companies in the IT Services industry, as compiled by experts at thestreet.com : Edgewater Technology Inc. (EDGW); NCI Inc. (NCIT); Sysorex Global Holding Corp. (SYRX); Cartesian Inc. (CRTN); CSP Inc. (CSPI); Computer Task Group Inc. (CTG); Mattersight Corp. (MATR); and Widepoint Corp. (WYY). See InterCloud Systems Inc PEER GROUP: IT Services , TheStreet Ratings, http://www.thestreet.com/r/ratings/reports/peergroup/ICLD.html.
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123. Additionally, the following chart demonstrates the clear divergence of
InterCloud’s stock price from the aggregate stock price of its peer index during the
Class Period and as the revelations of truth on March 13, 17, 20, and 27, 2014 became
known to the market:
124. In sum, the rapid declines in InterCloud’s stock price following the
March 13, 17, 20, and 27, 2014 disclosures were the direct result of the nature and
extent of the revelations made to investors and the market regarding InterCloud’s
illicit undisclosed promotional campaign, and their resulting financial impact, all of
which had been concealed or misrepresented by Defendants’ scheme and
misstatements. Thus, the revelations of truth, as well as the resulting clear market
reaction, support a reasonable inference that the market understood that prior
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statements concerning InterCloud were false and misleading. In short, as the truth
about Defendants’ prior misrepresentations and concealments was revealed, the
Company’s stock price quickly sank, the artificial inflation came out of the stock, and
Plaintiff was damaged, suffering true economic losses.
125. Accordingly, the economic loss, i.e. , damages, suffered by Plaintiff on
March 13, 18, 21, and 27, 2014 was a direct and proximate result of Defendants’
scheme and misrepresentations and omissions that artificially inflated InterCloud’s
stock price and the subsequent significant decline in the value of InterCloud’s stock
when the truth concerning Defendants’ prior misrepresentations and fraudulent
conduct entered the marketplace.
VI. PRESUMPTION OF RELIANCE
126. Plaintiff is entitled to a presumption of reliance under Affiliated Ute
Citizens of Utah v. United States , 406 U.S. 128 (1972), because the claims asserted
herein are primarily predicated upon omissions of material fact which there was a duty
to disclose. Specifically, Plaintiff is entitled to a presumption of reliance throughout
the Class Period because, as more fully alleged above, the Defendants failed to
disclose material information regarding InterCloud’s illicit promotional campaign.
127. Plaintiff also is entitled to a presumption of reliance under the fraud-on-
the-market doctrine for Defendants’ material misrepresentations, because the market
for InterCloud’s publicly traded securities was open, well-developed, and efficient at
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all times. As a result of these materially false and misleading statements, InterCloud’s
publicly traded securities traded at artificially inflated prices during the Class Period.
Plaintiff and other members of the Class purchased or otherwise acquired InterCloud’s
publicly traded securities relying upon the integrity of the market price of those
securities and the market information relating to InterCloud, and have been damaged
thereby.
128. At all relevant times, the market for InterCloud’s securities was an
efficient market for the following reasons, among others:
(a) InterCloud’s stock met the requirements for listing and was listed
and actively traded on the NASDAQ, a highly efficient and automated market;
(b) as a regulated issuer, InterCloud regularly made public filings with
the SEC, including its Forms 10-K, Forms 10-Q, and related press releases; and
(c) InterCloud regularly communicated with public investors via
established market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major newswire services
and through other wide-ranging public disclosures, such as communications with the
financial press, and other similar reporting services.
129. As a result of the foregoing, the market for InterCloud securities
promptly digested current information regarding InterCloud from all publicly
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available sources and reflected such information in the prices of InterCloud’s
securities.
130. Under these circumstances, all purchasers of InterCloud’s securities
during the Class Period suffered similar injury through their purchase of InterCloud’s
securities at artificially inflated prices and a presumption of reliance applies.
131. At the times they purchased or otherwise acquired InterCloud’s
securities, Plaintiff and other members of the Class were without knowledge of the
facts concerning the wrongful conduct alleged herein and could not reasonably have
discovered those facts. As a result, the presumption of reliance applies.
132. In sum, Plaintiff will rely, in part, upon the presumption of reliance
established by the fraud-on-the-market doctrine in that:
(a) Defendants made public misrepresentations during the Class
Period;
(b) the misrepresentations were material;
(c) the Company’s securities traded in an efficient market;
(d) the misrepresentations alleged would tend to induce a reasonable
investor to misjudge the value of the Company’s securities; and
(e) Plaintiff and the other members of the Class purchased the
Company’s securities between the time Defendants misrepresented material facts and
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the time the true facts were disclosed, without knowledge that the facts were
misrepresented.
VII. NO SAFE HARBOR
133. The federal statutory safe harbor provided for forward-looking statements
under certain circumstances does not apply to any of the allegedly false and
misleading statements pled in this complaint. Many of the specific statements pled
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. Indeed, the risk
warnings that may have been provided by Defendants in their Class Period statements
were not meaningful, were themselves false and misleading, and did not shield
Defendants from liability on the basis that such statements were “forward-looking.”
134. Alternatively, to the extent that the statutory safe harbor does apply to
any forward-looking statements pled herein, Defendants are liable for those false and
misleading forward-looking statements because, at the time each of those forward-
looking statements was made, as detailed above, the particular speaker knew that the
particular forward-looking statement was false or misleading and/or the forward-
looking statement was authorized and/or approved by an executive officer of
InterCloud who knew that those statements were false or misleading when made.
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Moreover, to the extent that Defendants issued any disclosures designed to “warn” or
“caution” investors of certain “risks,” those disclosures were also false and misleading
since they did not disclose that Defendants were actually engaging in the very actions
about which they purportedly warned and/or had actual knowledge of material adverse
facts undermining such disclosures.
VIII. PLAINTIFF’S CLASS ACTION ALLEGATIONS
135. Plaintiff brings this action as a class action pursuant to Federal Rule of
Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who
purchased or otherwise acquired the publicly traded common stock of InterCloud
between December 3, 2013 and March 27, 2014, inclusive, and who were damaged
thereby. Excluded from the Class are Defendants, the officers and directors of the
Company, at all relevant times, members of their immediate families and their legal
representatives, heirs, successors, or assigns, and any entity in which Defendants have
or had a controlling interest.
136. Because InterCloud has millions of shares of stock outstanding and
because the Company’s shares were actively traded on the NASDAQ, members of the
Class are so numerous that joinder of all members is impracticable. According to
InterCloud’s SEC filings, as of shortly after the close of the Class Period, InterCloud
had just over 10 million shares outstanding. While the exact number of Class
members can only be determined by appropriate discovery, Plaintiff believes that
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Class members number at least in the thousands and that they are geographically
dispersed.
137. Plaintiff’s claims are typical of the claims of the members of the Class
because Plaintiff and all of the Class members sustained damages arising out of
Defendants’ wrongful conduct complained of herein.
138. Plaintiff will fairly and adequately protect the interests of the Class
members and has retained counsel experienced and competent in class actions and
securities litigation. Plaintiff has no interests that are contrary to, or in conflict with,
the members of the Class it seeks to represent.
139. A class action is superior to all other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is
impracticable. Furthermore, as the damages suffered by individual members of the
Class may be relatively small, the expense and burden of individual litigation make it
impossible for the 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.
140. Questions of law and fact common to the members of the Class
predominate over any questions that may affect only individual members in that
Defendants have acted on grounds generally applicable to the entire Class. Among
the questions of law and fact common to the Class are:
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(a) whether Defendants violated the federal securities laws as alleged
herein;
(b) whether Defendants’ publicly disseminated press releases and
statements during the Class Period omitted and/or misrepresented material facts;
(c) whether Defendants failed to convey material facts or to correct
material facts previously disseminated;
(d) whether Defendants participated in and pursued the fraudulent
scheme or course of business complained of herein;
(e) whether Defendants acted willfully, with knowledge or severe
recklessness, in omitting and/or misrepresenting material facts;
(f) whether the market prices of InterCloud’s securities during the
Class Period were artificially inflated due to the material nondisclosures and/or
misrepresentations complained of herein; and
(g) whether the members of the Class have sustained damages as a
result of the decline in value of InterCloud’s stock when the truth was revealed and
the artificial inflation came out, and, if so, what is the appropriate measure of
damages.
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COUNT I FOR VIOLATIONS OF SECTION 10(b) OF THE
EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
141. Plaintiff repeats and realleges the allegations set forth above as though
fully set forth herein. This claim is asserted against all Defendants.
142. During the Class Period, Defendants, individually and collectively,
carried out a plan, scheme and course of conduct which was intended to and,
throughout the Class Period, did: (i) deceive the investing public, Plaintiff, and the
other Class members, as alleged herein; (ii) artificially inflate and maintain the market
price of InterCloud’s publicly-traded securities; and (iii) cause Plaintiff and the other
members of the Class to purchase InterCloud’s publicly-traded securities at artificially
inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct,
Defendants, individually and collectively, took the actions set forth herein.
143. These Defendants: (a) employed devices, schemes, and artifices to
defraud; (b) made untrue statements of material fact and/or omitted to state material
facts necessary to make the statements not misleading; and/or (c) engaged in acts,
practices, and a course of business which operated as a fraud and deceit upon the
purchasers of the Company’s securities in an effort to maintain artificially high market
prices for Company’s securities in violation of Section 10(b) of the Exchange Act and
Rule 10b-5. These Defendants are sued as primary participants in the wrongful and
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illegal conduct charged herein. Defendants Munro and Petraglia are also sued as
controlling persons of InterCloud and CSIR, as alleged below.
144. In addition to the duties of full disclosure imposed on Defendants as a
result of their making affirmative statements and reports, or participating in the
making of affirmative statements and reports to the investing public, they each had a
duty to promptly disseminate truthful information that would be material to investors
in compliance with the integrated disclosure provisions of the SEC as embodied in
SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17 C.F.R. §229.10, et seq .)
and other SEC regulations, including accurate and truthful information with respect to
the Company’s operations, sales, product marketing and promotion, financial
condition, and operational performance so that the market prices of the Company’s
publicly traded securities would be based on truthful, complete, and accurate
information.
145. Defendants, individually and in concert, directly and indirectly, by the
use, means, or instrumentalities of interstate commerce and/or of the mails, engaged
and participated in a continuous course of conduct to conceal adverse material
information about InterCloud’s fraudulent practices, as specified herein.
146. These Defendants each 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
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investors of InterCloud’s value, performance and continued substantial sales and
financial growth, which included the making of, or the participation in the making of,
untrue statements of material facts about InterCloud’s growth and omitting to state
material facts necessary in order to make the statements made about the growth not
misleading in light of the circumstances under which they were made, as set forth
more particularly herein, and engaged in transactions, practices, and a course of
business which operated as a fraud and deceit upon the purchasers of InterCloud’s
securities during the Class Period.
147. Defendants’ primary liability and controlling person liability arise from
the following facts, among others: (i) Defendants Munro and Petraglia were high-
level executives at the Company and CSIR during the Class Period; (ii) Defendants,
by virtue of their responsibilities and activities, were privy to, and participated in, the
creation, development, and reporting of the Company’s sales, marketing, projections,
reports, articles, and other communications; (iii) Defendants enjoyed significant
personal contact and familiarity with, were advised of, and had access to Defendant
Munro as well as the Company’s internal reports, and other data and information
about the Company’s trends and promotional activities at all relevant times; and (iv)
Defendants were aware of the Company’s dissemination of information to the
investing public which they knew or recklessly disregarded was materially false and
misleading.
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148. Each of the Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with severely reckless
disregard for the truth, in that each failed to ascertain and disclose such facts, even
though such facts were available to each of them. Such Defendants’ material
misrepresentations and/or omissions were done knowingly or with deliberate
recklessness and for the purpose and effect of concealing information regarding the
Company’s true condition from the investing public and supporting the artificially
inflated price of its securities. As demonstrated by Defendants’ misstatements and
omissions throughout the Class Period regarding InterCloud, Defendants, if they did
not have actual knowledge of the misrepresentations and omissions alleged, were
reckless in failing to obtain such knowledge by deliberately refraining from taking
those steps necessary to discover whether those statements were false or misleading.
149. As a result of the dissemination of the materially false and misleading
information and failure to disclose material facts, as set forth above, the market prices
of InterCloud’s securities were artificially inflated during the Class Period. In
ignorance of the fact that market prices of InterCloud’s publicly traded securities were
artificially inflated, and relying directly or indirectly on the false and misleading
statements made by Defendants, or upon the integrity of the market in which the
securities trade, and/or on the absence of material adverse information that was known
to, or disregarded with deliberate recklessness by, Defendants but not disclosed in
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public statements by Defendants during the Class Period, Plaintiff and the other
members of the Class acquired InterCloud’s securities during the Class Period at
artificially high prices and were damaged thereby, as evidenced by, among others, the
stock price declines above.
150. At the time of said misrepresentations and omissions, Plaintiff and the
other members of the Class were ignorant of their falsity and believed them to be true.
Had Plaintiff and the other members of the Class and the marketplace known of
Defendants’ fraudulent practices, the true nature and prospects of its business, or
InterCloud’s true intrinsic value, which were not disclosed by Defendants, Plaintiff
and the other members of the Class would not have purchased or otherwise acquired
their InterCloud publicly traded securities during the Class Period; or, if they had
acquired such securities during the Class Period, they would not have done so at the
artificially inflated prices which they paid.
151. By virtue of the foregoing, Defendants have each violated Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder.
152. As a direct and proximate result of Defendants’ wrongful conduct,
Plaintiff and the other members of the Class suffered damages in connection with their
respective purchases and sales of the Company’s securities during the Class Period, as
evidenced by, among others, the stock price declines discussed above, when the
artificial inflation was released from InterCloud’s stock.
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COUNT II FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST DEFENDANTS MUNRO AND PETRAGLIA
153. Plaintiff repeats and realleges the allegations set forth above as though
fully set forth herein. This claim is asserted against Defendants Munro and Petraglia.
154. Defendants Munro and Petraglia acted as controlling persons of
InterCloud and CSIR, respectively, within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level positions, participation
in, and/or awareness of, their respective company’s operations, and/or intimate
knowledge of their respective company’s fraudulent practices, Defendants Munro and
Petraglia had the power to influence and control, and did influence and control,
directly or indirectly, the decision-making of their respective companies, including the
content and dissemination of the various statements which Plaintiff contends are false
and misleading. Defendants Munro and Petraglia were provided with, or had
unlimited access to, copies of the articles, reports, and other communications alleged
by Plaintiff to be misleading prior to and/or shortly after these statements were issued
and had the ability to prevent the issuance of the statements or cause the statements to
be corrected.
155. In addition, Defendants Munro and Petraglia had direct involvement in
the day-to-day operations of their respective companies and, therefore, are presumed
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to have had the power to control or influence the particular transactions giving rise to
the securities violations as alleged herein and exercised the same.
156. As set forth above, Defendants each violated Section 10(b) and Rule 10b-
5 by their acts and omissions as alleged in this Complaint. By virtue of their
controlling positions, Defendants Munro and Petraglia are liable pursuant to Section
20(a) of the Exchange Act. As a direct and proximate result of Defendants Munro and
Petraglia’s wrongful conduct, Plaintiff and other members of the Class suffered
damages in connection with their purchases of the Company’s securities during the
Class Period, as evidenced by, among others, the stock price declines discussed above,
when the artificial inflation was released from InterCloud’s stock.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff, on his own behalf and on behalf of the Class, prays
for relief and judgment, as follows:
A. Declaring that this action is a proper class action and certifying Plaintiff
as class representative pursuant to Rule 23 of the Federal Rules of Civil Procedure and
Plaintiff’s counsel as Class Counsel for the proposed Class;
B. Awarding compensatory damages in favor of Plaintiff and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a
result of Defendants’ wrongdoing, in an amount to be proven at trial, including
interest thereon;
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C. Awarding Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including attorneys’ fees and expert fees; and
D. Such other and further relief as the Court deems appropriate.
JURY DEMAND
Plaintiff hereby demands a trial by jury.
DATED: January 9, 2015 COHN LIFLAND PEARLMAN HERRMANN & KNOPF LLP
/s/ Peter S. Pearlman PETER S. PEARLMAN
JEFFREY W. HERRMANN Park 80 West – Plaza One 250 Pehle Avenue, Suite 401 Saddle Brook, NJ 07663 Telephone: 201/845-9600 201/845-9423 (fax) [email protected] [email protected]
Liaison Counsel
ROBBINS GELLER RUDMAN & DOWD LLP
JACK REISE 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected]
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ROBBINS GELLER RUDMAN & DOWD LLP
SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected]
Lead Counsel for Plaintiffs
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on January 9, 2015, I authorized the electronically
filed of the foregoing with the Clerk of Court using the CM/ECF system, which will
send a Notice of Electronic Filing to all counsel of record.
/s/ Peter S. Pearlman PETER S. PEARLMAN
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