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A securities class action stemming from the 1999 initial public offering of the online financial information provider ILife.com has been dismissed by a federal judge with the U.S. District Court for the Southern District of New York, who found the allegations largely inaccurate. The plaintiffs, purchasers of ILife stock whose holdings declined precipitously in value in the months following the IPO, had argued that a discrepancy between the printed and electronic versions of the IPO prospectus rendered the offering defective, and that ILife had misrepresented the financial condition of the company in the offering materials. But Southern District Judge William H. Pauley III disagreed. Ruling in DeMaria v. Andersen, 00 Civ. 2337, Pauley concluded that Securities and Exchange Commission rules dictate that information included in a printed prospectus but omitted from the electronic version is automatically considered part of the Registration Statement filed with and declared effective by the SEC. And he found that many of the supposed omissions alleged by the plaintiffs had in fact been disclosed by ILife in the prospectus. ILife, a North Palm Beach, Fla.-based company now known as Bankrate Inc., filed an initial registration statement for the IPO, including a printed prospectus, that the SEC declared effective on May 13, 1999. The company subsequently filed the registration statement and prospectus electronically through the SEC’s EDGAR filing system. As is customary, a bar graph in the printed version of the prospectus that depicted the online publishing revenues and net losses of ILife on a quarterly basis for 1998 and the first quarter of 1999 was represented in the electronic version with a narrative description of the chart. But there was one discrepancy between the bar graph in the printed version and the narrative in the electronic version: The description on the electronic prospectus identified ILife’s net losses as publishing revenues and omitted any reference to net losses. The IPO took place on May 13, 1999; priced at $13 per share, it raised $45.5 million. Less than two weeks later, ILife announced its 1999 first-quarter results, including an increase in net losses to $6 million from $703,000 for the same period a year before. The stock price steadily declined over the next year, and by June 14, 2000, the day before the plaintiffs filed their suit, it was trading at $1.75 per share. DIFFERENCES CHALLENGED The suit was filed by name plaintiffs Brian DeMaria, Robert Brisken, Edward Sisco and Terry C. Whorton against five officers of ILife and the underwriters of the offering, ING Baring Furman Selz LLC, and Warburg Dillon Read. The suit alleged that because the printed prospectus given to the SEC was not the prospectus used in the offering of ILife stock to the investing public, purchases of the stock should be rescinded because they are “unregistered securities.” In addition, the plaintiffs contended that the prospectus was materially false and misleading because it did not disclose financial results for the first quarter of 1999, despite the fact that the quarter ended 43 days before the IPO. The complaint also alleged that the prospectus failed, among other things, to include a purported reversal in ILife’s trend of 25 percent revenue growth and a substantial increase in the ratio of net loss to revenue. In opposition, the defendants argued that the allegations in the complaint were either overstated or incorrect. They contended that the supposed decline in revenue growth was based on inaccurate rounding of the revenue figures, and that the growth had actually remained steady, from 19 percent for the fourth quarter of 1998 to 18 percent for the first quarter of 1999. (The plaintiffs had alleged a drop in growth from 25 percent to 10 percent over that span.) Similarly, on the claim of an increase in the net-loss-to-revenue ratio, the plaintiffs argued that ILife had absorbed a massive loss in the first quarter of 1999 that went undisclosed to investors at the time of the IPO. But the defendants responded, and Judge Pauley agreed, that the printed prospectus included, in a bar graph, itemized losses of about $6 million for the quarter. The prospectus also included an italicized disclaimer noting the investment’s “high degree of risk,” and a bold-type warning of the company’s “history of losses” and the expectation of operating losses in the future. FACTS NOT IN EVIDENCE In his ruling, Pauley first found that the plaintiffs had alleged no facts that would provide them the standing to sue the underwriter defendants because none of them had bought stock directly from the underwriters. Second, as to the discrepancy between the versions of the prospectus, Pauley concluded that SEC Rule 304 provides that information included in the printed prospectus but omitted from the electronic one is deemed to be part of the Registration Statement filed with and declared effective by the SEC. “As a result,” he wrote, “there is no cognizable claim that the registration of ILife shares was defective.” Finally, on the claim that information in the prospectus was materially false, the judge found that plaintiffs did have standing to sue despite being secondary purchasers of the stock. But he agreed with the defendants that the facts simply did not bear out the claim. “[T]he amended complaint contains a number of conclusory statements and characterizations that are not based in fact,” Pauley wrote, “and, second, the Prospectus made substantial disclosure with respect to the precise omissions that undergird plaintiffs’ claim.” Plaintiffs were represented by I. Stephen Rabin and Brian P. Murray, of Rabin & Peckel. Martin I. Kaminsky, of Pollack & Kaminsky, represented the individual defendants. Jay B. Kasner and William A. McBride, of Skadden, Arps, Slate, Meagher & Flom, represented ING Baring Furman Selz and Warburg Dillon Read.

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