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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF ILLINOIS

In re GROUPON, INC. SECURITIES LITIGATION

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Master File No.: 12 CV 2450 

Class Action 

JURY TRIAL DEMANDED 

This Document Relates To 

 ALL CASES 

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Hon. Charles R. Norgle 

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT 

Lead Plaintiff Michael Carter Cohn (“Plaintiff”), individually and on behalf of all other 

persons similarly situated, by his undersigned attorneys, for his Consolidated Amended Class 

Action Complaint against Defendants, alleges upon personal knowledge as to himself and his 

own acts, and upon information and belief as to all other matters, based on, inter alia, the 

investigation conducted by and through his attorneys, which included, among other things: a 

review of wire and press releases published by and regarding Groupon, Inc. (NASDAQ: GRPN) 

(“Groupon” or the “Company”); Defendants’ public statements, documents, conference calls and 

announcements; Securities and Exchange Commission (“SEC”) filings; securities analysts’ 

reports and advisories about the Company; a private investigation including interviews of certain 

former Groupon employees; consultation with a leading accounting expert; and information 

readily obtainable on the Internet. 

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NATURE OF THE ACTION

1. This is a securities fraud class action brought on behalf of all persons or entities 

who: (1) purchased or otherwise acquired Groupon common stock pursuant and/or traceable to 

the Company’s Registration Statement and Prospectus, issued in connection with to its 

November 4, 2011 initial public offering (the “IPO” or the “Offering”) seeking to pursue 

remedies under §§11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”); and (2) 

purchased or otherwise acquired Groupon common stock during the period from February 8, 

2012 through and including March 30, 2012, seeking to pursue remedies under §§10(b) and 

20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 10b-5 (the 

“Exchange Act Sub-class”). This case arises from the material misrepresentations Groupon made 

to investors in connection with its IPO and fourth quarter 2011 (“Q4 2011”) earnings report 

regarding Groupon’s financial results, accounting practices and internal controls. 

2. Groupon is an internet marketing company with lofty ambitions – it aims to 

transform entirely the way that consumers purchase from local businesses. Groupon is doing 

nothing short of “inventing a new industry,” according to its Chief Executive Officer, Defendant 

Andrew Mason (“Mason”). Groupon uses its massive membership base to sell discounted 

vouchers (also eponymously called “groupons”) for goods and services offered by third-party 

merchants: 

The site offers subscribers (44 million and counting) at least one deal a day in 

their city—say, half-off for sushi dinner or a spa treatment. But Groupon's 

innovation is the collective buying model suggested by its name: group plus 

coupon. A certain number of people need to buy into any given deal before it 

kicks in, or "tips" in Groupon parlance. Once the deal tips—for example, 200 

people have purchased a $40 coupon for an $80 massage—the merchant and 

Groupon split the revenue roughly 50/50, and a group of customers has an 

unbeatable bargain. 

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“Groupon’s $6 Billion Gambler,” The Wall St. Jorunal, December 20, 2010.1

3. Groupon calls its business a “two sided marketplace,” matching its enormous 

email list of bargain-hunting consumers with merchants looking to add new customers. In the 

road show preceding its IPO,2

 Groupon depicted the marketplace graphically as follows: 

 

1

 As Groupon grew, the minimum purchase threshold became insignificant. In correspondence 

filed with the SEC on July 14, 2011, Groupon indicated that “less than 1%” of deals offered 

failed to meet this minimum threshold. 

2

 An IPO road show consists of one or more presentations by an issuer of securities to potential 

buyers intended to generate interest for a public offering. Typically, these presentations are 

limited to institutional investors. However, Groupon posted a presentation of its road show on 

the internet, where it could be viewed by the investing public. The official site has since been 

removed, but an archived copy of the presentation remains available at: 

http://www.businessinsider.com/watch-andrew-mason-present-the-groupon-roadshow-2011-10. 

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Groupon operates as a service provider in this model. To merchants, it provides performancebased advertising, earning a portion of the price of each voucher sold. To consumers, it provides 

access to a curated selection of heavily-discounted buying opportunities, and guarantees 

satisfaction with a 100% money-back refund on all purchases. 

4. Groupon’s innovative marketing concept garnered enormous interest from both 

local merchants and bargain-hunting consumers. Mason boasted that “[t]here’s never been 

anything—radio, TV, newspaper, whatever—that could generate small business sales so 

quickly.” See “Meet the Fastest Growing Company Ever,” Forbes, August 31, 2010. Because of 

this success, Groupon enjoyed “insane” growth in the period leading up to its IPO, according to 

Defendant Eric P. Lefkofsky (“Lefkofsky”). A chart used by Defendant Mason in the IPO road 

show confirms that virtually all of its revenues were attributable to “unprecedented growth” 

rather than continuing business: 

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5. Unfortunately, during the Class Period, Defendants attempted to extend their 

creativity to financial reporting. “We don’t measure ourselves in conventional ways,” Defendant 

Mason proclaimed in a letter to investors. Commentators saw it differently. Groupon was 

“accounting challenged,” Francine McKenna wrote in Forbes after the Class Period. See 

“Groupon: Ernst & Young’s Accounting Challenged Client,” Forbes, April 23, 2012.

Specifically, Groupon accelerated revenue recognition of refundable sales in violation of 

Generally Accepted Accounting Practices (“GAAP”), and misrepresented to the SEC that it had 

the historical evidence and internal controls required to utilize this favorable accounting 

treatment, when in fact it did not. 

6. Accounting standards unquestionably required Groupon to defer revenue 

recognition until the refund period expired or until it had: (a) generated a large amount of 

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verifiable historical data involving homogenous transactions to substantiate a reasonable refund 

estimate; and (b) implemented internal controls necessary to timely and reliably estimate 

refunds. Groupon did not have such historical data and had not implemented such internal 

controls at the time of its IPO or at the time it announced Q4 2011 earnings. Accordingly, it was 

required to defer accrual of this revenue until the refund period expired. 

7. The limited historical refund data Groupon had only involved a fraction of its 

merchant partners and business lines, and in virtually every case fell far short of the two years’ 

worth of data from homogenous transactions required by authoritative accounting standards. See 

Section VI. As Groupon spokesman Paul Taaffe conceded, Groupon’s historical data was of 

little value: “Every three months, Groupon is a different company.”3

 Taaffe was correct. At the 

time of its IPO, most of Groupon’s transactions involved deals that Groupon had never promoted 

before, offered by merchants and bought by customers with which Groupon had little or no 

historical experience. In many cases, the deals were from entirely new lines of business that 

Groupon had launched only months earlier. 

8. Groupon’s lack of historical data was exacerbated by its own limited visibility and 

deficient internal controls. The Company had no control over the quality of the goods and 

services it sold, and as it ultimately conceded, did not have effective procedures to reliably assess 

refunds. To make matters worse, Groupon staffed its accounting department with inexperienced 

and unqualified temporary workers. 

9. Without the data or competence to reasonably calculate refunds, Groupon had to 

defer revenues under GAAP. See Section VI. In violation of these rules, Groupon 

impermissibly accelerated revenue recognition to the time of sale– even for sales in new lines of 

 

3

 Associated Press, “Groupon Restatement Sparks More Worries,” April 2, 2012, available at 

http://www.washingtontimes.com/news/2012/apr/2/groupon-restatement-sparks-more-worries/. 

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business, areas like high-priced and medical services that its CEO, Defendant Mason, described 

as having an inherently higher refund rate, and offerings of merchants for which Groupon had no 

track record whatsoever. 

10. Groupon used its impermissible refund accounting to boost the amount of 

revenues and reduce the operating losses it claimed in the amended registration statement it filed 

with the SEC on Form S-1A on October 31, 2012 (“Registration Statement”), and in all 

subsequent amendments thereof, as well as in the prospectus it delivered to investors in 

connection with the IPO and filed with the SEC on Form 424B4 on November 7, 2011 

(“Prospectus”). Groupon also omitted from the Registration Statement and Prospectus material 

adverse information regarding defects in critical financial controls. Defendants used the 

materially false and misleading Registration Statement and Prospectus to sell over $715 million 

in Groupon common shares to unsuspecting investors, achieving an extremely favorable 

valuation. 

11. By the time Groupon announced its earnings for the Q4 2011on February 8, 2012, 

Groupon and its senior executives knew or recklessly disregarded that Groupon could not 

substantiate its refund accounting and revenue acceleration. They knew that Groupon had no 

refund data at all for about half of its merchants at the time it booked the revenues, knew that 

many of the sales were from product lines which only months earlier did not exist, and knew that 

Groupon had doubled down on the sales in the fourth quarter that had inherently higher refund 

rate – higher-priced services, medical services which required screening by the provider, and 

travel deals subject to hotel availability. Moreover, Groupon had been warned in September 

2011 that it faced a substantial refund risk going forward. 

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12. Whether due to recklessness, or a desire to present favorable results at all costs, 

Groupon and its senior management continued to use the improper accounting when they 

reported Q4 2011 results to investors on February 8, 2012. Although Groupon had actually lost 

approximately $15 million, by improperly accelerating revenue and violating GAAP, Groupon 

reported to investors that it had achieved the opposite result: an operating profit of $15 million, 

its first operating profit since early 2010. 

13. As forensic accounting expert Howard Schilit explained in CFO Journal, 

Groupon’s revenue recognition was wholly improper. Groupon had to defer revenue recognition 

until the refund period because its inability to reasonably estimate future refunds foreclosed it 

from qualifying for accelerated recognition: “Everything would have to be deferred revenue 

until the end of the refund period,” he said.4

 See “Groupon’s Accounting Revision Turns on 

FAS 48,” CFO Journal, April 3, 2012. Dr. Schilit is the founder of Center for Financial 

Research & Analysis and the author of Financial Shenanigans: How to Detect Accounting 

Gimmicks & Fraud in Financial Reports (2nd Edition, March 2002). 

14. In an article on CFO.com, accounting standards expert Ashwinpaul Sondhi 

confirmed that the treatment was improper: “You should be able to come up with a reasonable 

and reliable estimate of return before you’re permitted to recognize revenue. It appears Groupon 

did not have that ability.” See “Groupon Restatement Raises Reserving Questions,” CFO.com, 

 

4

 Correspondence between Groupon and the SEC indicates that Groupon’s executives understood 

the accounting rules governing their financial reporting. See Letter to SEC dated July 14, 2011 

(acknowledging that its accounting was governed by Staff Accounting Bulletin Topic 

13(A)(4)(a), which only allows accelerated recognition of “refundable fees for service” if strict 

criteria are met), available at: http://www.sec.gov/Archives/edgar/data/1490281/ 

000104746911006336/filename1.htm. Groupon simply misrepresented to the SEC that it met 

the strict requirements for such accelerated recognition, when it did not. See id.; Paragraphs 79 

to 80 below. 

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April 2, 2012. Dr. Sondhi is a member of the Emerging Issues Task Force (EITF) of the 

Financial Accounting Standards Board (FASB), and serves on the Investor Advisory Group 

(IAG) of the Public Company Accounting Oversight Board (PCAOB). He also co-authored the 

2006-2009 editions of the CCH Revenue Recognition Guide. 

15. Groupon’s improper refund accounting was disclosed after the market closed on 

Friday, March 30, 2012, when it filed its first audited financial report as a public company on 

Form 10-K (“2011 10-K”), and amended its Q4 2011 earnings report on Form 8-K/A (“March 

30, 2012 8-K/A”). In these filings, Groupon revealed: (a) that it had failed to properly account 

for refunds in Q4 2011; (b) that, as a result, it had materially misstated previously reported Q4 

2011 and Full-Year 2011 revenue, operating income (loss), operating expense, net income (loss), 

earnings (loss) per share, and cost of revenue; and (c) that it had material weaknesses in its 

internal controls, particularly those controls intended to ensure the accurate and timely estimate 

of customer refunds, and the proper closing of financial reporting periods. These were precisely 

the risks concealed by Defendants’ misrepresentations and omissions. 

16. As a result of these revelations, Groupon’s stock plummeted. On Monday, April 

2, 2012, the first trading day following Groupon’s disclosures, the Company’s stock closed on 

extraordinarily high volume of 10.09 million shares at $15.28 – a single-trading-day decline of 

$3.10 or 16.9% from its prior close, and a decline of $4.72, or 23.7% from its IPO price. The 

following day, after reports surfaced that the SEC was investigating these disclosures, prices fell 

another $.26, or 1.7%, to $15.02. 

JURISDICTION AND VENUE 

17. The claims asserted herein arise under Sections 11, 12(a)(2) and 15 of the 

Securities Act, 15 U.S.C. §§ 77k and 77o and under Sections 10(b) and 20(a) of the Exchange 

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Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5 promulgated thereunder by the SEC, 

17 C.F.R. § 240.10b-5. 

18. This Court has jurisdiction over the subject matter of this action pursuant to 28 

U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa and Section 22 

of the Securities Act, 15 U.S.C. § 77v. 

19. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 

U.S.C. § 78aa, Section 22 of the Securities Act, 15 U.S.C. § 77v, and 28 U.S.C. § 1391(b). 

Defendant Groupon is headquartered in this district; Defendant Groupon, the Individual 

Defendants and Underwriter Defendants conduct business in this district, and wrongful conduct 

at issue took place in this district. 

PARTIES

20. Lead Plaintiff Michael Carter Cohn purchased shares of Groupon common stock 

pursuant and/or traceable to the Company’s materially untrue and misleading Registration 

Statement at various times during the Class Period, and suffered damages as a result of the 

federal securities law violations alleged herein. 

21. Defendant Groupon Inc. is a Delaware corporation with its principal executive 

offices located at 600 West Chicago Avenue, Suite 620, Chicago, Illinois 60654. Groupon is a 

internet marketing company that connects local and national merchants to consumers by offering 

discounted vouchers for goods and services. Groupon went public via a November 4, 2011 IPO, 

and is actively traded on the NASDAQ Global Select exchange under the ticker symbol 

“GRPN.” 

22. Defendant Eric P. Lefkofsky (“Lefkofsky”) was at all relevant times the 

Company’s Chairman of the Board of Directors (“Board”). He is also a Co-Founder of Groupon. 

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Defendant Lefkofsky signed and caused to be filed with the SEC the materially false and 

misleading Registration Statement in connection with the IPO. 

23. Defendant Andrew D. Mason (“Mason”) was at all relevant times the Company’s 

Chief Executive Officer (“CEO”). Defendant Mason is also a Co-Founder of Groupon. He 

signed and caused to be filed with the SEC the materially false and misleading Registration 

Statement in connection with the IPO. 

24. Defendant Jason Child (“Child”) was at all relevant times the Company’s Chief 

Financial Officer. Defendant Child signed and caused to be filed with the SEC the materially 

false and misleading Registration Statement in connection with the IPO. 

25. Defendant Kevin Efrusy (“Efrusy”) was at all relevant times a member of the 

Company’s Board and an Audit Committee Member. Defendant Efrusy signed and caused to be 

filed with the SEC the materially false and misleading Registration Statement in connection with 

the IPO. 

26. Defendant Theodore J. Leonsis (“Leonsis”) was at all relevant times a member of 

the Company’s Board and the Chairman of the Audit Committee. Defendant Leonsis signed and 

caused to be filed with the SEC the materially false and misleading Registration Statement in 

connection with the IPO. 

27. Defendant Howard Schultz (“Schultz”) was at all relevant times a member of the 

Company’s Board and an Audit Committee Member. Defendant Schultz signed and caused to be 

filed with the SEC the materially false and misleading Registration Statement in connection with 

the IPO. 

28. The Registration Statement stated that under the Audit Committee charter to be 

effective upon completion of the IPO, the Audit Committee was to be responsible for, inter alia, 

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“monitoring the integrity of our financial statements and our compliance with legal and 

regulatory requirements as they relate to financial statements or accounting matters,” “reviewing 

the adequacy and effectiveness of our internal control policies and procedures,” and “reviewing 

with management and the independent auditors our interim and year-end operating results.” 

29. Defendant Joseph M. Del Preto was at all relevant times the Company’s Chief 

Accounting Officer (“CAO”). He signed and caused to be filed with the SEC the materially false 

and misleading Registration Statement in connection with the IPO. 

30. Defendants Lefkofsky, Mason, Child, Efrusy, Del Preto, Leonsis and Schultz are 

sometimes collectively referred to herein as the “Individual Defendants.” 

31. Defendant Morgan Stanley & Co. LLC (“Morgan Stanley”) was the primary 

underwriter of the Company’s IPO and assisted in the preparation and dissemination of 

Groupon’s IPO materials. Additionally, Morgan Stanley acted as representative for all of the 

underwriters involved in the Groupon IPO. Morgan Stanley’s main offices are located at 1585 

Broadway, New York, NY 10036. 

32. Defendant Goldman, Sachs & Co. (“Goldman Sachs”) was an underwriter of the 

Company’s IPO and assisted in the preparation and dissemination of Groupon’s IPO materials. 

Additionally, Goldman Sachs acted as representative for all of the underwriters involved in the 

Groupon IPO. Goldman Sachs’s headquarters are located at 200 West Street, New York, NY 

10282. 

33. Defendant Credit Suisse Securities (USA) LLC (“Credit Suisse”) was an 

underwriter of the Company’s IPO and assisted in the preparation and dissemination of 

Groupons’s IPO materials. Additionally, Credit Suisse acted as representative for all of the 

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underwriters involved in the Groupon IPO. Credit Suisse has its principal U.S. location at 11 

Madison Avenue, New York, New York 10010. 

34. Defendants Morgan Stanley, Goldman Sachs, and Credit Suisse are sometimes 

collectively referred to herein as the “Underwriter Defendants.” 

35. Defendant Groupon, the Individual Defendants, and the Underwriters Defendants 

are sometimes collectively referred to herein as “Defendants.” 

SUBSTANTIVE ALLEGATIONS 

I. Groupon’s Business Model. 

36. Groupon sells heavily discounted vouchers on behalf of its merchant partners for 

goods and services to a growing base of subscribers via email, mobile application and Groupon’s 

website. The Registration Statement contained two examples of how these deals are advertised 

on Groupon’s website: 

 

37. When a customer purchases a deal from Groupon, three things occur: (1) the 

customer receives a voucher that can be can be printed or stored on a subscriber’s cell phone 

using Groupon’s mobile application; (2) Groupon remits the merchant’s share – usually 50-60% 

of the amount paid by the customer – to the merchant in three payments over a period of sixty 

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(60) days; and (3) Groupon grants the customer a 100% money-back satisfaction guarantee 

called the Groupon Promise. 

38. A customer can redeem a voucher by presenting it to the merchant prior to its 

expiration date – usually six or nine months after the deal was featured by Groupon. As 

Defendant Mason explained at a Goldman Sachs investor conference on February 16, 2012, 

customers typically redeem vouchers most heavily in the month following purchase and the 

month preceding expiration. Vouchers that expire cannot be used to obtain the advertised 

promotion, and are not protected by the Groupon Promise. Under Groupon’s current merchant 

contracts, expired vouchers can continue to be redeemed at the merchant for the original 

purchase price paid by the customer, though not for the advertised promotional value. 

Groupon’s website contains an example of a printed voucher: 

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II. Groupon’s “Fanatical” Refund Policy. 

39. All of Groupon’s vouchers are backed by a 100% money-back, no questions 

asked, satisfaction guarantee called the Groupon Promise that the Company describes as 

“fanatical.” See “Groupon’s 6 Billion Gambler,” The Wall St. Journal, Dec. 20, 2010. 

Defendant Mason explained in the IPO road show that the extreme approach helped it attract 

customers: “the Groupon Promise came from asking ourselves what would it take for us to buy a 

Groupon from an unknown business.” 

40. As Defendant Mason explained, “any customer can return a groupon, no 

questions asked—even if they have used it—if they feel that Groupon has let them down.” See 

“Groupon’s $6 Billion Gambler,” The Wall St. Journal, Dec. 20, 2010. Groupon described the 

Groupon Promise to the SEC as a “completely open return policy” that is “an integral, intangible 

element of each Groupon voucher” and “provides that the Company's customers will receive a 

refund of the entire purchase price of the Groupon in the event the merchant is unable or fails to 

deliver in a satisfactory manner the goods or services that are the subject of the Groupon.” See 

Groupon Letters to SEC filed on August 10 and 29, 2011. 

41. Groupon’s “open return policy” is dramatically more generous than the limited 

refund policy of Groupon’s largest competitor, LivingSocial, and the policy for the voucher 

business of another publicly-traded competitor, TravelZoo. LivingSocial generally only allows 

refunds for one week after a customer purchases a voucher: 

LivingSocial will provide a refund if you contact us within seven days after 

you’ve purchased your voucher. After that, we provide refunds upon request in 

cases where you are unable to redeem a voucher because the merchant has 

gone out of business before the promotional period ends. 

See LivingSocial website, http://help.livingsocial.com/articles/what-is-your-refund-policy.

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Similarly, TravelZoo only provides refunds within a week of voucher purchase, and does not 

provide any refunds for used vouchers. See TravelZoo website, http://www.travelzoo.com/localdeals/terms-of-sale/. 

III. Groupon Becomes “The Fastest Growing Company Ever.” 

42. In the year before its decision to go public, Groupon was lauded as the “Fastest 

Growing Company Ever.” See Paragraph 4. However, it began much more modestly. Groupon 

was spun out of an earlier venture that Defendants Mason and Lefkofsky launched in November 

2007 called ThePoint.com, a website intended to gather people together for collective social 

action. ThePoint.com’s twist was that the social action would only move forward if enough 

members had agreed to participate. Mason promoted the site with a series of publicity stunts, 

including an attempt to gain support to build a glass dome over the City of Chicago. 

43. The “glass dome” stunt provided just enough media exposure to attract the 

attention of venture capitalists. In January 2008, ThePoint.com raised $4.8 million from leading 

venture capital firm New Enterprise Associates. However, by fall of 2008, ThePoint.com’s 

backers were demanding that Mason and Lefkofsky find a way to monetize the website, or shut it 

down. 

44. Mason thought that the technology behind ThePoint.com could also be used for 

collective purchasing. He negotiated a deal with the pizzeria on the ground floor of his office 

building in the Near North Side of Chicago to offer a voucher entitling the buyer to two pizzas 

for the price normally charged for one, but only if a minimum number were sold. The 

experiment was a success. Twenty buyers took advantage of the deal, and Groupon was born. 

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45. Groupon grew moderately from November 2008 to mid-2009, but continued to 

serve only Chicago and offer only a single deal each day. By mid-2009, Groupon was sending 

its email to about 200,000 members and had generated just over $1 million in gross billings. 

46. At that time, Groupon expanded to other U.S. cities, beginning with Boston, and 

started to grow at a pace that its Chairman, Defendant Lefkofsky, described as “insane.”5 

Defendants Child and Mason soon concluded that Groupon could recover its cost to acquire a 

new customer in less than a year. In a November 30, 2011 presentation at the Credit Suisse 

Technology Conference, Mason called this revelation an “aha” moment – one which drove them 

to “put the pedal to the medal and invest as aggressively as we can in new customer acquisition.” 

47. As Groupon’s Registration Statement highlighted, Groupon achieved the rapid 

growth it intended. Between the second quarter of 2009 and the third quarter of 2011 – the last 

quarter before its IPO – virtually all of Groupon’s metrics demonstrated a meteoric expansion: 

We increased our revenue from $1.2 million in the second quarter of 2009 to 

$430.2 million in the third quarter of 2011. We generated these revenues from 

gross billings of $3.3 million for the second quarter of 2009 as compared to 

gross billings of $1,157.2 million for the third quarter of 2011. 

**** 

We expanded from five North American markets as of June 30, 2009 to 175 

North American markets and 45 countries as of September 30, 2011. Revenue 

from our international and North American operations was $268.7 million and 

$161.5 million, respectively, in the third quarter of 2011. 

We increased our subscriber base from 152,203 as of June 30, 2009 to 142.9 

million as of September 30, 2011. A total of 43,014 customers purchased 

Groupons through the end of the second quarter of 2009 as compared to 29.5 

million through the end of the third quarter of 2011, including 16.0 million 

customers who have purchased more than one Groupon since January 1, 2009. 

We increased the number of merchants featured in our marketplace from 212 

in the second quarter of 2009 to 78,649 in the third quarter of 2011. 

 

5

 See Lefkofsky interview, available at: http://www.builtinchicago.org/blog/bootstrapping-ericlefkofsky-tastytrade. 

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Case: 1:12-cv-02450 Document #: 125 Filed: 10/29/12 Page 22 of 74 PageID #:1084
23 

Groupon boasted during the IPO road show, to “execute on previously unaddressable 

opportunities.” 

51. The Company compounded this growth in the first half of 2011 by expanding into 

several entirely new lines of business, including travel (Groupon Getaways), live events 

(Groupon Live), “instant” or short-duration deals (Groupon Now!), and direct sales of products 

(Groupon Goods). As Defendant Mason explained in the IPO road show, these new businesses 

were already important to Groupon though they had only operated “for a few months” before the 

IPO. 

IV. Groupon’s Initial Misleading IPO Filings. 

52. From the time that Groupon filed its initial IPO registration statement on June 2, 

2011, it did not comply with GAAP. 

53. First, Groupon tried to claim as its own revenues all of the funds it collected for 

its merchant partners. Accounting professors Anthony Catanch (Villanova University) and 

Edward Ketz (The Pennsylvania State University) described the problem as follows: 

This means that if the Company sells a coupon for $40 promising $80 in 

services, it records the entire $40 as revenue, despite its having to remit 50% or 

more of the coupon proceeds to the merchant that actually provides the goods 

or services. Has Groupon really earned $40 (gross revenue recognition) or $20 

(net recording, Groupon’s actual marketing commission). 

What’s the big deal you ask? Only that the Company has overstated its 

actual revenue by 154.82% in 2010 and 178.81% in 2009. Real revenue is 

really what the Company reports as gross profit. 

“Trust No One, Particularly Not Groupon’s Accountants,” Grumpy Old Accountants Blog, 

August 24, 2011 (emphasis added), available at http://blogs.smeal.psu.edu/ 

grumpyoldaccountants/archives/281. While this and other sources contained various criticisms 

at the time of the IPO, Groupon expressly admonished investors that they should not rely on 

Case: 1:12-cv-02450 Document #: 125 Filed: 10/29/12 Page 23 of 74 PageID #:1085
24 

external sources and instead only rely on the Registration Statement and Prospectus in assessing 

the offering. See Registration Statement at 1. 

54. As Catanach and Ketz noted, however, Groupon’s accounting treatment directly 

violated the guidance provided by the SEC in Staff Accounting Bulletin (“SAB”) 101: 

This example [topic 10 of SAB 101] mirrors Groupon’s fact pattern except that 

in the example, the internet company actually sells products (not coupons), and 

offers no “satisfaction guarantee.” Even in this case the SEC concludes that 

revenue should be reported NET not GROSS, since the internet company: 

- Did not take title to the products, 

- Did not have the risk and rewards of ownership, and 

- Acted as an agent or broker. 

Clearly, Groupon should report its revenue NET, not gross. And the 

Company’s CFO should have known better given his tenure with Amazon as a 

finance VP in Asia (and as an accountant with Arthur Andersen). Amazon’s 

revenue recognition policy clearly states: 

If we are not primarily obligated, and do not have latitude in establishing 

prices, amounts earned are determined using a fixed percentage, a fixed 

payment schedule, or a combination of the two, we generally record the net 

amounts as commissions earned. 

See http://blogs.smeal.psu.edu/ grumpyoldaccountants/archives/281. 

55. Catanach and Ketz filed a whistleblower complaint with the SEC. Thereafter, the 

SEC forced Groupon to cease this GAAP violation. On September 8, 2011, Groupon had a 

conference call with SEC staff, after which it committed in writing to present only its own share 

of gross billings as revenues in subsequent amendments of its registration statement. See 

Groupon Letter to SEC, filed September 16, 2011.6

 

 

6

 According to SEC spokesman John Nester, the SEC does not publish this correspondence until 

at least 20 days after an IPO, in part to emphasize that the company, and not the SEC, is 

responsible for its own disclosures. See “Facebook Fought SEC To Mute Mobile Risks Before 

IPO,” Bloomberg BusinessWeek, Oct. 10, 2012, available at: 

http://www.businessweek.com/news/2012-10-10/facebook-fought-sec-to-keep-mobile-risksCase: 1:12-cv-02450 Document #: 125 Filed: 10/29/12 Page 24 of 74 PageID #:1086
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56. Groupon also tried to understate operating expenses by inventing a metric it called 

ACSOI. ACSOI stripped from operating income Groupon’s customer acquisition expenses and 

stock-based compensation expenses. As Catanach and Ketz explained, ACSOI “pretend[s] that 

stock-based compensation and acquisition-related costs are unimportant when they are very real 

costs that the entity has incurred. Instead of being transparent, managers who eliminate these 

items are merely trying to find a nonnegative number to report.” “Groupon CFO’s Spin Raises 

More Red Flags,” Grumpy Old Accountants Blog, Feb. 15, 2012, available at: 

http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/530. 

57. Groupon used ACSOI accounting to show positive adjusted operating income for 

both fiscal year 2010 and the first quarter of 2011. However, Groupon had posted operating 

losses of $420 million in 2010 and $117.1 million for the first quarter of 2011. See “Groupon 

Updates IPO Filing, Admits It’s Unprofitable,” CNN.com, August 10, 2011, available at 

http://money.cnn.com/2011/08/10/technology/groupon_accounting/index.htm?source=cnn_bin. 

By letter dated July 22, 2011, the SEC told Groupon that the exclusion of marketing expenses 

was “potentially misleading” and asked that the ACSOI metric be removed. In response, 

Groupon removed its presentation of ACSOI calculations from the Registration Statement. 

58. In addition to the repeated deviations from accounting standards, Defendants 

Lefkofsky and Mason both made impermissible promotional statements during the pre-IPO 

“quiet period.” To avoid misleading promotional activity and ensure that information is properly 

conveyed to investors through Registration Statement filings, insiders are legally restricted from 

making promotional statements until after the offering is declared effective. Despite this 

restriction, a day after Groupon filed its S-1, Defendant Lefkofsky told Bloomberg that Groupon 

 

hidden-before-ipo-crash. As such, this and other letters referenced in this Complaint were not 

available to investors prior to the Class Period. 

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would be “wildly profitable” and was already a “great business.”7

 Later in the quiet period, 

Defendant Mason sent a lengthy promotional email to thousands of employees which was 

predictably leaked within hours to the media. In text vetted by Defendants Lefkofsky and Child, 

Defendant Mason touted “unprecedented growth” and wrote: 

 I’ll summarize my excitement with four points: 1) Growth in our core business 

is strong 2) Our investments in the future — businesses like Getaways & 

NOW — look great, 3) We are pulling away from competition, and 4) We’ve 

built a great team that I would pit against anyone. In other words, all the stuff 

that one would want to look good? It looks good. 

See Mason email dated August 25, 2011, copied in Registration Statement at A-1. After the SEC 

criticized these improper promotional activities, Groupon inserted language into its Registration 

Statement advising investors to disregard the statements. However, by that time, the hype had 

already served its purpose, generating buzz and reaching millions of investors through endless 

repetition in the business press. 

V. Defendants Use Materially False Representations In Their Registration 

Statement And Prospectus To Raise $715 Million From Public Investors. 

59. After several formal letters between SEC staff and Groupon regarding 

deficiencies in Groupon’s IPO filings, the Company grudgingly revised its registration statement 

to remove the grossly improper attempt to claim merchant revenues as Groupon’s own, and the 

distorted ACSOI metric. However, Groupon’s amended registration statement did not comply 

with GAAP. Instead, it simply replaced one misleading revenue measure with another. 

 

7

 Groupon is not the first company that Lefkofsky attempted to inflate through false hype. 

Fortune magazine reported that Lefkofsky said with respect to another of his companies, 

Starbelly: “Lets start having fun... lets get funky... let's announce everything... let's be WILDLY 

positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride 

down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO 

LOSE...” See “The Checkered Past of Groupon’s Chairman,” Fortune, June 10, 2011, available 

at: http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/ With this “radical” hype, 

Lefkofsky was able to successfully sell Starbelly to another company called Ha-Lo Industries for 

$240 million, much of which went Lefkofsky. Not long after the transaction, Ha-Lo declared 

bankruptcy. Id. 

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60. On October 31, 2011, Groupon filed the operative Registration Statement, which 

still violated GAAP and presented Groupon’s operating results and internal controls in a 

materially misleading manner. The following day, by letter to the SEC, Defendant Mason 

requested on behalf of Groupon that the SEC declare the Registration Statement effective on an 

accelerated basis by 3:00 p.m. on November 3, 2011 without further review, pursuant to SEC 

regulations that permitted such acceleration as long as the issuer acknowledges its responsibility 

to comply with federal securities laws. In the November 3, 2011 letter, Defendants Groupon and 

Mason expressly acknowledged: 

(a) that a declaration of effectiveness would “not foreclose the Commission from 

taking any action with respect to the Registration Statement;” 

(b) that a declaration of effectiveness “would not relieve Groupon from its full 

responsibility for the adequacy and accuracy of the disclosure in the 

Registration Statement;” and 

(c) that “Groupon may not assert the declaration of effectiveness as a defense in 

any proceeding initiated by the Commission or any person under the federal 

securities laws of the United States.” 

See Letter filed November 1, 2011 with the SEC, available at: 

http://www.sec.gov/Archives/edgar/data/1490281/000104746911008885/filename1.htm. As a 

result of these acknowledgements, the SEC declared the Registration Statement effective as 

requested. 

61. Thereafter, on November 3, 2011, Defendants increased the size of the offering 

by an additional 5.75 million shares, priced the IPO at $20 per share, and distributed a 

Prospectus to investors repeating the same misrepresentations contained in the Registration 

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Statement. See Form S-1 MEF dated November 3, 2011, available at 

http://www.sec.gov/Archives/edgar/data/1490281/000110465911060758/0001104659-11-06075 

8-index.htm; Prospectus dated November 3, 2011 and filed with SEC November 7, 2011, 

available at http://www.sec.gov/Archives/edgar/data/1490281/000104746911009142/000104746 

9-11-009142-index.htm. 

62. The following day, November 4, 2011, pursuant to the misleading Registration 

Statement and Prospectus, Defendants sold a total of 35.75 million Groupon shares to public 

investors at $20 per share. The offering raised approximately $715 million, including 

approximately $45 million for the Underwriter Defendants. The Company’s IPO – the ninthlargest ever according to The Wall St. Journal – was viewed at the time as a resounding success. 

63. The successful offering was made possible by a Registration Statement and 

Prospectus that materially inflated Groupon’s financial results and omitted crucial adverse 

information regarding Groupon’s accounting practices and weaknesses in Groupon’s internal 

controls. 

64. In particular, the Registration Statement and Prospectus each misrepresented that 

Groupon had grown its revenue to $430.2 million in the third quarter of 2011, and $1,118.3 

million for the first nine months of 2011. These statements were false and misleading when 

made because: (a) the figures included sales subject to a right of refund that under GAAP could 

not be recognized as revenue until after the refund period expired; (b) as a result of (a), Groupon 

had not actually achieved $430.2 million in revenue during the third quarter of 2011 or $1,118.3 

million for the first nine months of 2011, which would have been apparent had Defendants 

presented Groupon’s financial results consistent with GAAP; and (c) Groupon lacked sufficient 

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internal controls to determine the proper amount of revenue, to reasonably estimate reserves for 

future refunds, and to properly close its accounts at the end of an accounting period. 

65. The Registration Statement and Prospectus each misrepresented that Groupon had 

achieved revenue per subscriber of $11.6 in the first nine months of 2011. These statements 

were materially false and misleading when made because: (a) the figures included sales subject 

to a right of refund that under GAAP could not be recognized as revenue until after the refund 

period expired; (b) as a result of (a), Groupon had not actually achieved revenue per subscriber 

of $11.6 in the first nine months of 2011, which would have been apparent had Defendants 

presented Groupon’s financial results consistent with GAAP; and (c) Groupon lacked sufficient 

internal controls to determine the proper amount of revenue, to reasonably estimate reserves for 

future refunds, and to properly close its accounts at the end of an accounting period. 

66. With respect to Groupon’s revenue recognition policies, the Registration 

Statement and Prospectus each stated the following: 

We recognize revenue from Groupons when the following criteria are met: 

persuasive evidence of an arrangement exists; delivery has occurred; the 

selling price is fixed or determinable; and collectability is reasonably assured. 

These criteria are met when the number of customers who purchase the daily 

deal exceeds the predetermined threshold, the Groupon has been electronically 

delivered to the purchaser and a listing of Groupons sold has been made 

available to the merchant. At that time, our obligations to the merchant, for 

which we are serving as an agent, are substantially complete. Our remaining 

obligations, which are limited to remitting payment to the merchant and 

continuing to make available on our website the listing of Groupons previously 

provided to the merchant, are inconsequential or perfunctory. We record as 

revenue the net amount we retain from the sale of Groupons after paying an 

agreed upon percentage of the purchase price to the featured merchant 

excluding any applicable taxes. Revenue is recorded on a net basis because we 

are acting as an agent of the merchant in the transaction. 

Registration Statement at 67. These statements were materially false and misleading when 

made because: (a) Defendants omitted that this accelerated revenue recognition policy did not 

comply with GAAP, which required Groupon to defer revenue until the refund had expired or the 

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amount of refunds could be reasonably estimated; and (b) at the time a listing had been made, 

Groupon’s obligations to the merchant were not substantially complete; to the contrary, Groupon 

remained obligated to refund the voucher purchase price – including the merchant’s share – to 

dissatisfied customers. 

67. The Registration Statement and Prospectus each described Groupon’s accounting 

treatment of refunds as follows: 

At the time revenue is recorded, we record an allowance for estimated 

customer refunds primarily based on historical experience. We accrue costs 

associated with refunds in accrued expenses on the consolidated balance 

sheets. The cost of refunds where the amount payable to the merchant is 

recoverable is recorded in the consolidated statements of operations as a 

reduction to revenue. The cost of refunds under the Groupon Promise, when 

there is no amount recoverable from the merchant, are presented as a cost of 

revenue. To the extent the refund is provided to a subscriber, we record the 

expense within selling general and administrative expense in the consolidated 

statements of operations. 

These statements were materially false and misleading when made because: (a) Groupon did not 

qualify for reserve accounting of its refundable sales under GAAP; (b) Groupon lacked sufficient 

homogenous historical data required under GAAP to reasonably estimate the amount of future 

refunds for virtually all of its sales; and (c) Groupon lacked sufficient internal controls to 

determine the proper amount of revenue, to reasonably estimate reserves for future refunds, and 

to properly close its accounts at the end of an accounting period. 

68. The Registration Statement and Prospectus each affirmatively misrepresented 

compliance with GAAP. Each stated: “The Company's consolidated financial statements were 

prepared in accordance with United States generally accepted accounting principles (‘U.S. 

GAAP’).” These statements were materially false and misleading when made because: (a) 

Groupon’s financial statements were not prepared in accordance with U.S. GAAP; (b) in 

particular, Groupon’s revenue was inflated due to impermissible acceleration of sales subject to a 

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right of refund even though Groupon did not meet the strict requirements for acceleration under 

SAB Topic 13 and SAB 104; and (c) as a result of Groupon’s inflation of revenue, Groupon’s 

operating results and net earnings were also materially inflated and Groupon’s refund reserve 

was improperly recorded. 

69. The Registration Statement and Prospectus each also stated: “As we do not have 

control over our merchants and the quality of products or services they deliver, we rely on a 

combination of our historical experience with each merchant and online and offline research of 

customer reviews of merchants for the development of our estimate for refund claims.”8

 These 

statements were materially misleading when made because they omitted the following adverse 

information: (a) Groupon did not have sufficient historical experience with each merchant to 

satisfy the strict requirements for making a reasonable refund estimate under SAB Topic 13 and 

SAB 104; (b) Groupon’s reliance on “online and offline reviews” instead of verifiable refund 

data was not reasonable and did not comply with FASB and SEC guidance; (c) many of the sales 

were in entirely new lines of business where Groupon had little or no verifiable historical refund 

data; and (d) Groupon lacked sufficient internal controls to reasonably estimate future refunds. 

VI. Groupon’s Accelerated Revenue Recognition Violated GAAP. 

a. GAAP Prohibits Recognition Of Refundable Sales Prior To Expiration Of 

Refund Period Unless Refunds Can Be Reasonably Estimated With 

Verifiable Data. 

70. SEC Regulation S-X, 17 C.F.R. Part 210, requires management of companies 

registering for public offerings to ensure that financial statements are presented in accordance 

with GAAP. It is a fundamental principle of accounting under U.S. GAAP that revenue may not 

 

8

 These were reviews from third-party sites, not reviews gathered or verified by Groupon. As 

Defendant Mason admitted on the February 8, 2012 earnings call, Groupon did not bother 

obtaining reviews from its customers until “four, five months” earlier, i.e., September-October 

2011. 

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32 

be recognized unless it is both “realized” and “earned.” These two criteria are set forth in the 

Financial Accounting Standards Board’s (“FASB”) Concept Statement 5 (paragraph 83), and in 

numerous accounting standards and accounting literature governing revenue recognition, 

including the SEC’s SAB Topic 13 and SAB 104. Professor Ronald Dye, Leonard Spacek 

Professor and former Chairman of the Department of Accounting and Information Management 

at the Kellogg School of Business, Northwestern University,9

 explains these two criteria as 

follows: 

In short, revenue is “realized” in a sales transaction when the firm's 

customer gives the firm cash, or claims that can be readily converted into cash, 

and the firm has the right to retain those funds or claims. Revenue is "earned" 

when the firm has performed substantially all that it needs to do related to the 

product or service the firm is supplying to the customer related to the sale. 

Where the customer has a right of refund, and there is considerable uncertainty 

about the volume of refunds customers will request, the amount of cash or 

claims that the firm can expect to retain is not reasonably known until the 

refund period lapses. Therefore, the revenues related to such sales are not 

realized until the refund period is over. 

71. To avoid recording unrealized revenue in the case of refundable sales, SEC SAB 

Topic 13 and SAB 104 each warn against recognizing revenue before the refund period expires: 

Generally, the staff believes that a sales price is not fixed or determinable 

when a customer has the unilateral right to terminate or cancel the contract 

and receive a cash refund. A sales price or fee that is variable until the 

occurrence of future events (other than product returns that are with the scope 

of Statement 48) generally is not fixed or determinable until the future event 

occurs. The revenue from such transactions should not be recognized in 

earnings until the sales price or fee becomes fixed or determinable. Moreover, 

revenue should not be recognized in earnings by assessing the probabilty that 

 

9

 Professor Dye provides background factual information on the accounting principles at issue in 

this case. In addition to being a tenured professor and former department chair at the Kellogg 

School of Business, Professor Dye also serves on the editorial boards of the Journal of 

Accounting Research, Journal of Accounting and Economics, and the Review of Accounting 

Studies, and has authored more than 40 papers appearing in these and other leading academic 

accounting journals. Professor Dye has reviewed Groupon’s Registration Statement, Q4 2011 

earnings announcement, revised Q4 2011 earnings announcement, and 2011 10-K as well as the 

FASB and SEC materials on revenue recognition cited herein, and related accounting literature. 

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33 

significant, but unfulfilled, terms of a contract will be fulfilled at some point in 

the future. Accordingly, the revenue from such transactions should not be 

recognized in earnings prior to the refund privileges expiring.

SAB Topic 13(A)(4)(a), Response to Question 1; SAB 104 at 54-55 (emphasis added). 

72. Instead, the SEC makes clear that “the preferable accounting method for services 

subject to potential refunds”10 and “the most direct authoritative literature to be applied on the 

extinguishment of obligation under such contracts” is set forth in Statement of Financial 

Accounting Standards (“FAS”) 140, and also in FASB ASC Topic 860. See SAB Topic 

13(A)(4)(a), Responses to Question 1 and 4; SAB 104 at 56, 64, FAS 140 and FASB ASC Topic 

860 each provide that refundable sales should be recorded initially as a monetary liability (i.e., 

deferred revenue), and shifted to revenue (technically, derecognized as a liability and recognized 

as revenue) only when the refund obligation lapses. 

73. GAAP requires service firms that offer their dissatisfied customers the right to 

receive refunds of their payments for service following the provision of the service to satisfy 

stringent criteria in order to be allowed to deviate from this “preferable accounting method” and 

“book” (i.e., record in their financial statements) revenues related to the services they render 

prior to the expiration of the refund period. If any of these stringent criteria is not satisfied, 

service firms are not permitted to accelerate the recognition of revenue and, instead, must defer 

recording revenue until the refund period expires. According to Professor Dye, 

Accounting standard setters have long been concerned that companies with 

refund policies may try to book sales that ultimately fail to materialize because 

customers request refunds of those sales after trying the companies’ products 

or services. To forestall firms from recognizing revenue on such “phantom” 

sales, both the SEC and GAAP permit such companies to accelerate the 

 

10 Accounting literature on the treatment of service revenue is controlling because Groupon is 

primarily a service provider, see Paragraph 3, and, furthermore because the refund accounting 

misrepresentations at issue relate primarily to service deals. In fact, sales of Groupon Goods are 

not protected by the Groupon Promise, but instead are subject only to a 14-day right of return. 

See http://www.groupon.com/faq, 

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recognition of revenues associated with refundable sales from the end of the 

refund period to the time of sale, and adjust their reserves for estimated 

refunds, only if specific criteria are met to reasonably ensure that the 

companies are recording revenue that is both earned and realized. For sales of 

products subject to a right of return, the criteria are established in FAS 48 and 

related staff accounting bulletins, especially SAB Topic 13, SAB 101, and 

SAB 104. Sales of services subject to a right of refund are not part of FAS 48; 

however, SEC staff has stated that it would allow analogous treatment to 

service providers in limited circumstances where specific criteria are met. For 

refundable sales of services, the criteria for revenue acceleration are specified 

in SAB Topic 13 and SAB 104. If the criteria of FAS 48, SAB Topic 13, SAB 

101 and SAB 104 are not met, as applicable, revenue cannot be accelerated and 

must be accounted for in the manner provided by FAS 140. 

74. FAS 48, implemented over three decades ago, makes clear that revenue on sales 

of products subject to a right of return cannot be recognized on an accelerated basis prior to the 

expiration of the refund period unless all of six specific conditions are met, including the 

absolute requirement that the amount of future refunds be reasonably estimable: 

Criteria for Recognizing Revenue When Right of Return Exists 

6. If an enterprise sells its product but gives the buyer the right to return the 

product, revenue from the sales transaction shall be recognized at time of 

sale only if all of the following conditions are met: 

a. The seller's price to the buyer is substantially fixed or determinable at the 

date of sale. 

b. The buyer has paid the seller, or the buyer is obligated to pay the seller and 

the obligation is not contingent on resale of the product. 

c. The buyer's obligation to the seller would not be changed in the event of 

theft or physical destruction or damage of the product. 

d. The buyer acquiring the product for resale has economic substance apart 

from that provided by the seller. 

e. The seller does not have significant obligations for future performance to 

directly bring about resale of the product by the buyer. 

f. The amount of future returns can be reasonably estimated (paragraph 8). 

Sales revenue and cost of sales that are not recognized at time of sale 

because the foregoing conditions are not met shall be recognized either when 

Case: 1:12-cv-02450 Document #: 125 Filed: 10/29/12 Page 34 of 74 PageID #:1096
35 

the return privilege has substantially expired or if those conditions 

subsequently are met, whichever occurs first. 

FAS 48, Paragraph 6(b) (emphasis added). 

75. FAS 48 recognizes that there are many circumstances which can impair a 

company’s ability to reasonably estimate the amount of future returns: 

8. The ability to make a reasonable estimate of the amount of future returns 

depends on many factors and circumstances that will vary from one case to the 

next. However, the following factors may impair the ability to make a 

reasonable estimate: 

a. The susceptibility of the product to significant external factors, such as 

technological obsolescence or changes in demand 

b. Relatively long periods in which a particular product may be returned 

c. Absence of historical experience with similar types of sales of similar 

products, or inability to apply such experience because of changing 

circumstances, for example, changes in the selling enterprise's marketing 

policies or relationships with its customers 

d. Absence of a large volume of relatively homogeneous transactions

The existence of one or more of the above factors, in light of the significance 

of other factors, may not be sufficient to prevent making a reasonable estimate; 

likewise, other factors may preclude a reasonable estimate. 

Id., Paragraph 8 (emphasis added). 

76. The SEC expressly warned public companies in SAB 101 that they must adhere to 

FAS 48, Paragraphs 6 and 8: “The staff reminds registrants that if a transaction fails to meet all 

of the conditions of paragraphs 6 and 8 in FAS No. 48, no revenue may be recognized until 

those conditions are subsequently met or the return privilege has substantially expired, 

whichever occurs first.” See SEC Staff Accounting Bulletin 101, Paragraph 9, published 

December 3, 1999, available at: http://www.sec.gov/interps/account/sab101.htm (emphasis 

added). SAB 101 and Topic 13 are two of the most important guidance documents on revenue 

Case: 1:12-cv-02450 Document #: 125 Filed: 10/29/12 Page 35 of 74 PageID #:1097
36 

recognition, and certainly are known to senior financial executives serving financial reporting 

functions in public companies. 

77. Where the revenues in question were derived from the sale of a service, the SEC 

has allowed treatment analogous to FAS 48 in two circumstances: 

(a) Sales of refundable memberships: where the sale involves a membership 

subject to a right of refund, the SEC has stated that it will allow accelerated 

revenue recognition similar to that permissible under FAS 48 only if: 

(i) “estimates of terminations or cancellations and refunded revenues 

are being made for a large pool of homogeneous items;” 

(ii) “reliable estimates can be made on a timely basis;” 

(iii) “there is a sufficient company-specific historical basis on which to 

base the estimates, and the company believes such historical 

experience is predictive of future events;” and 

(iv) the membership price is fixed and determinable other than the right 

of refund. 

See SAB Topic 13(A)(4)(a), Response to Question 1; SAB 104(A)(4)(a), Response to 

Question 1 (same). 

(b) Other limited circumstances: the SEC has also stated that it will allow 

accelerated recognition in a manner analogous to FAS 48 of “service 

transactions subject to customer cancellation privileges other than those 

specifically addressed” in its analysis of refundable membership fees where: 

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37 

(i) there exists “a large pool of homogenous data,” which the SEC 

defines to mean at least two years in a particular line of business or 

class of service: 

The staff typically expects that the historical experience 

be based on the particular registrant’s historical 

experience for a service and/or class of customer. In 

general, the staff typically expects a start-up company, a 

company introducing new services, or a company 

introducing services to a new class of customer to have at 

least two years of experience to be able to make 

reasonable and reliable estimates; and 

(ii) each of the other criteria for accelerated recognition of refundable 

membership revenues, as set forth in subparagraph (a) above, are 

satisfied. 

See SAB Topic 13(A)(4)(a), Response to Question 2 and footnote 55; SAB 

104(A)(4)(a), Response to Question 2 and footnote 55 (same). 

78. In SAB 101, the SEC reiterated that two years’ experience is generally required to 

assess the refund rate for a new service, a new line of business, or a new class of customer: 

Paragraph 8 of [FAS 48] notes various factors that may impair the ability to 

make a reasonable estimate of returns, including the lack of sufficient 

historical experience. The staff typically expects that the historical experience 

be based on the particular registrant's historical experience for a service and/or 

class of customer. In general, the staff typically expects a start-up company, a 

company introducing new services, or a company introducing services to a 

new class of customer to have at least two years of experience to be able to 

make reasonable and reliable estimates.

SAB 101, Question 7, footnote 40 (emphasis added). 

b. Groupon Could Not Qualify For Revenue Acceleration Under GAAP. 

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38 

79. When the SEC questioned Groupon’s aggressive accounting prior to the IPO, 

Groupon claimed to apply SAB Topic 13(A)(4)(a), and falsely stated that it qualified for 

accelerated revenue recognition under the strict requirements of that authority: 

[SEC] Comment No. 65

It appears that the “Groupon Promise” is unconditional. In light of your rapid 

growth and entry into new markets, explain to us why you believe the amount 

of future refunds is reasonably estimable. Tell us the variance between your 

estimates and actual refund claims. We note your disclosure on page 17.

[Groupon] Response:

The Company’s policy is to defer revenue recognition for the amount of 

purchase price refunds expected to be ultimately granted at the time of the 

transaction. Further, based on the criteria in SAB Topic 13.A.4, the Company 

believes it has the ability to make a reasonable estimate of those potential 

returns at the time the voucher is purchased. Those criteria include:

 the estimate of refunds are made for a large pool of homogeneous items;

 reliable estimates of refunds can be made on a timely basis;

 there is sufficient specific historical basis upon which to estimate the 

refunds, and the Company believes that such historical experience is predictive 

of future events; and

 the amount of the transaction is fixed at the outset of the arrangement.

The Company uses a rolling average of the historical refund percentages for all 

historical months excluding any outliers in order to determine the estimated 

refund percentage. Obvious outliers are excluded from the analysis as these 

percentages are not indicative of future refunds (particularly for the earlier 

months of the Company’s existence). This analysis is done for each type of 

currency in which the Company transacts. While the Company has a relatively 

limited history of operations, taking into consideration the sheer volume of 

transactions (approximately 60 million Groupons sold) as well as the lack of 

any material change in the refund percentage over time provides the Company 

comfort that its analysis is reasonable.

While the Company is rapidly growing and expanding into new markets, it 

does not believe this hinders its ability to make this estimate. For example, as 

the Company deals with more and more merchants, it does not believe the 

characteristics of its merchants within a geographical region differ from one 

another such that it would materially affect the Company’s estimates. Further, 

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39 

based on the Company’s historical experiences to date, it has not noted 

significantly different trends from one geography to another that would have a 

material effect on its reserve amount.

The Company notes that refunds historically have averaged approximately 4% 

of revenue from its inception through the present, including during periods of 

rapid growth.11 Therefore, it is the Company’s position that the amount of 

future refunds is reasonably estimable. 

See Letter of Groupon to SEC, filed July 14, 2011, at 34-35. 

80. These representations, which formed the cornerstone of Groupon’s improper 

revenue accounting in its IPO and Q4 2011 earnings announcement, were manifestly untrue. 

Groupon lacked the historical data, experience, and internal controls required under Topic 13 

and other SEC and FASB guidance to calculate a “reasonable estimate” of refunds. To the 

contrary, Groupon demonstrated numerous factors that FASB and SEC guidance warned would 

make such a determination inherently unreasonable and unreliable. 

(1) Groupon had little or no verifiable refund data for virtually all of its 

merchant partners. 

81. Groupon did not even come close to possessing the two years of refund data 

expressly referenced in Topic 13, SAB 101, and SAB 104. Although Groupon claimed in the 

Registration Statement to base its refund estimate principally on its “historical experience with 

each merchant,” see id. at 17, at the time of the IPO, the Company had zero historical 

experience with about half of its merchants, which were trying Groupon and its novel 

discounting concept for the first time. With most other merchant partners, it had only a few 

months’ experience. Groupon’s lack of a historical relationship with its merchant partners was 

both a function of its rapid growth (Groupon “has operated at a substantial scale for only a 

 

11 At the time Groupon sent this letter to the SEC in July 2011, Groupon was still improperly 

claiming all of gross billings to be its revenue. See Paragraphs 53 to 55 above. Accordingly, 

Plaintiff understands the 4% reference in this letter to pertain to the figure that Groupon now 

calls gross billings. 

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40 

limited period of time”) and an intentional policy “to limit repeat merchants.” Registration 

Statement at 11, 51. 

82. Moreover, when initially signing a merchant, Groupon did not collect verifiable 

data regarding their refund rates, nor would there be a reasonable basis to extrapolate the refund 

rates between existing customers of a company and new customers Groupon would attract only 

through heavy discounting and its “fanatical” refund policy. Groupon also did not have 

verifiable refund information from other businesses offering similarly discounted vouchers for 

similar deals pursuant to a similar refund policy. Thus, Groupon did not even have an external 

source of verifiable refund data. 

(2) Groupon had little or no experience in many of the product lines it 

had entered just prior to its IPO. 

83. In the months preceding its IPO, Groupon expanded into numerous new product 

lines with which it lacked historical refund experience. 

84. Travel: In June 2011, Groupon launched a travel business in partnership with 

Expedia, Inc. called “Groupon Getaways.” Groupon Getaways peddled an inventory of 

discounted travel destinations – primarily hotel and resort stays – to Groupon’s customers. 

Groupon’s travel deals raised particular problems with regard to estimation of refunds. Groupon 

had not previously offered hotel and resort stays on a widescale basis to its customers. Thus, 

Groupon lacked historical refund data not only with respect to the particular hotels and resorts it 

promoted, but with the travel business altogether. 

85. High-priced services: In early 2011, Groupon started increasing its efforts to 

feature deals for high-priced services. Confidential Witness (“CW”) 1, a program coordinator at 

Groupon’s Chicago headquarters from March 2011 until February 2012 reported that Groupon 

began to emphasize high-end deals at about the time he joined in March 2011. CW 1 explained 

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41 

that the huge change coincided with the Company’s purchase of Livenation.com, an online 

provider of event ticketing. After that, “everything started to shift,” according to CW 1. CW 1 

attended an important “all hands” meeting in or around March 2011 at the Roosevelt Theatre, 

during which Defendant Mason and other executives told the approximately 1000 employees in 

attendance that “everything was going to be reinvented,” and that the Company would emphasize 

higher-priced, higher-return deals to thwart off competition. 

86. According to CW 2, a senior account executive in Groupon’s Manhattan offices 

from November 2011 to April 2012, Groupon focused on high-end deals during his tenure at the 

Company: “They wanted high-end deals as soon as I came in. They just started to focus on 

selling the high-end deals and didn’t worry about the back end.” According to CW 2, the highend deals had higher refund rates – something Groupon itself admitted at the end of the Class 

Period. As Groupon also was ultimately forced to admit, it lacked the ability to reasonably 

assess the refund rates for such deals. 

87. Medical and aesthetic services: One subset of Groupon’s push into higher-priced 

deals caused particular refund problems – deals for medical and high-end aesthetic services like 

LASIK optical surgery and “cool sculpting,” a noninvasive substitute for liposuction. Groupon 

sold vouchers for these services without regard to whether its customers were medically 

qualified. Customers who bought these high-end services and learned that they were poor 

candidates for the procedure (for example, having a prescription or optical condition not suitable 

for LASIK, or having a body fat percentage too high to effectively benefit from cool sculpting) 

would then seek and receive refunds from Groupon. See Paragraphs 90 to 92 below. 

88. Groupon Goods, Groupon Live, and Groupon Now!: In addition to Groupon 

Getaways and the high-priced medical/spa deals, between May and August 2011, Groupon 

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launched three other major lines of business. Groupon Goods was an attempt by Groupon to 

mass market daily product deals a national basis, launched August 2011. Groupon Live was a 

separate business unit selling concert and similar event tickets launched in May 2011, derived 

from Groupon’s purchase of Livenation.com. Groupon Now! was a new business concept 

offering very short-term instant deals aimed at providing an immediate customer boost to local 

merchants. Groupon had no historical experience in any of these lines, and certainly lacked the 

large pool of historical refund data needed to substantiate such a refund estimate under GAAP. 

(3) Groupon’s Refund Data Was Not Homogenous. 

89. Historical refund data can only be used to support a reasonable estimate under 

SAB Topic 13 if the data involves homogenous transactions. The SEC defines “homogenous” 

to mean “service transactions with the same characteristics such as terms, periods, class of 

customers, nature of service, etc.” See SAB Topic 13(A)(4)(a), Response to Question 1. While 

Groupon claimed to possess refund data for 60 million transactions, these transactions were not 

homogenous. Instead, Groupon’s offerings involved different services, with substantially 

differing terms and refund periods. Even those deals that were not part of brand new business 

lines involved sales of widely varying services and goods. Groupon sold discounts on 

everything from a meal at a seafood restaurant in Louisville, Kentucky to eye surgery in Los 

Angeles, California to more esoteric offerings, like an intricate Japanese New Year’s feast called 

“osechi” at a Tokyo restaurant and even a discounted circumcision in Manila, Philippines. 

90. Moreover, Groupon did not experience a homogenous refund rate across deal 

types. Certain deal types, like medical deals and travel deals, had elevated refund rates. After 

the Class Period, in a JPMorgan investor conference on May 17, 2012, Defendant Mason 

admitted that medical deals had a “pre-baked-in” refund problem: “There are also higher price 

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point categories like LASIK eye surgery, where we actually sell these vouchers to customers 

knowing that they're going to have to go through a screening process to determine if they're even 

eligible, so there is a pre-baked-in expected refund rate that's inherent to those categories.” 

91. Consistent with Mason’s admission, numerous confidential witnesses have 

corroborated that Groupon’s medical deals had higher refund rates. CW 3, a customer service 

representative for Groupon in Chicago from June 2011 to August 2012, stated that many 

customers requested refunds on LASIK, cool sculpting, and similar deals for medical reasons. 

92. According to CW 4, an account representative with Groupon in Chicago from 

October 2010 to July 2012, Groupon learned in early 2011 that the medical service deals were 

subject to a higher refund rate than other Groupon deals. In the Spring of 2011, CW 4 

participated along with many other sales personnel in a conference call with Darren Schwartz, 

Groupon’s Senior Vice-President of Sales. Schwartz told the sales team that the Company was 

experiencing an unduly high refund rate from high-end deals like LASIK, and therefore Groupon 

would begin to pay its sales representatives a commission only on the successful redemption of a 

voucher rather than upon the sale of the voucher for these high-end deals. CW 2 confirmed that 

the same information was conveyed to him in sales meetings after he started in November 2011 

and by other sales employees. 

93. Similarly, Groupon’s travel deals were subject to unique and often opaque 

restrictions that impacted a customer’s ability to redeem a travel voucher and, consequently, the 

refund rate for such vouchers. For example, a voucher for a hotel stay could only be utilized if 

the hotel could accommodate the Groupon customer at the time of desired travel: 

Unlike Expedia, Travelocity, Priceline, Jetsetter and nearly every other major 

travel provider, Groupon does not require consumers to pick their dates and 

confirm availability at the time of purchase. When a consumer finds he can’t 

use his Groupon months later, he calls for a refund. 

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“Why Groupon is Poised for Collapse,” VentureBeat, March 31, 2012, available 

at: http://venturebeat.com/2012/03/31/why-groupon-is-poised-for-collapse. Moreover, unlike a 

restaurant where a Groupon customer could take any available table, many hotels and resorts 

limited the number of Groupon customers they accept at a time: 

Much like airlines, hotels divide their rooms into multiple inventory buckets. 

In order to use a Groupon, there must be availability in the Groupon bucket. 

Because of the low price that hotels receive for Groupon rooms, Groupon 

customers will be in one of the lowest availability buckets. 

“Groupon Getaways Aren’t The Deal They Seem To Be,” GigaOm.com, September 14, 2011, 

available at: http://gigaom.com/2011/09/14/groupon-getaways-arent-the-deal-they-seem-to-be/. 

Also, Groupon’s practice of obscuring restrictions on travel deals increased dissatisfaction and 

refunds: “To make matters worse, Groupon Getaways puts all of this fine print on a separate tab 

that most users will miss. In contrast, Groupon partner Expedia, in its own non-Groupon 

product, puts the restrictions right on the front page in a prominent position.” Id.

94. Even beyond medical and travel deals, Groupon’s refund experience varied 

widely depending on the price of a deal. As Defendant Mason admitted in the May 17, 2012 

JPMorgan investor conference: 

 So, as we move to a higher price point categories, a lot of those categories 

either had inherently higher refund rates. It just stands to reason that if you buy 

a $60 massage voucher, you are more likely to return it if you don't have a 

chance to use it, than you are $1 Dairy Queen Blizzard deal, which you might 

be happy to allow to just expire or if for whatever other reason you've had a 

bad experience, you won't use it, you won't pursue a refund, because it's not 

worth the time on the phone, right. 

95. Further, even for a single deal, Groupon’s refund cost would vary by as much as 

50%, depending on when the refund was requested. As Felix Salmon explained in Reuters: 

The issue at hand is that of refunds, and how they’re accounted for. Let’s say 

that Groupon has managed to sell 240 coupons for “cool sculpting”, at $500 

apiece. That’s a total of $120,000. The coupons expire on September 19, in six 

months’ time. 

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Let’s also assume that, as per usual, Groupon keeps 50% of the proceeds, and 

gives the other 50% to the merchant. In this case, it would keep $60,000 for 

itself, and remit $60,000 to Dr. Aron Kressel. But Dr. Kressel wouldn’t get all 

the money up front. He gets one third, or $20,000, immediately. He gets 

another $20,000 after 30 days. And then he gets the final $20,000 after 60 

days. That’s May 18. 

Now, Kressel might not get all of his $60,000. Let’s say that some of the 

people who bought a coupon turn up for their initial consultation before May 

18, and are told that they’re not medically suitable for the treatment and 

therefore can’t have it. Those people — let’s say there are 20 of them — are 

eligible for a full refund from Groupon. So Groupon gives those people back 

their money, $10,000 in all, and holds back from Kressel his $5,000 share of 

that money. As a result, Kressel’s final payment is not $20,000 but rather 

$15,000, and he ends up getting paid $55,000 in total by Groupon. 

And at the same time, of course, Groupon’s own revenues from the deal are 

also reduced to $55,000: the economics of selling 240 coupons and refunding 

20 of them before May 18 are basically the same as the economics of selling 

220 coupons and refunding none of them. 

After May 18, however, things change. At that point, Kressel is paid out, but 

Groupon still has the Groupon Promise. As a result, if anybody gets turned 

away from Kressel’s office after May 18, Groupon eats the whole refund. Let’s 

say that appointments become easier to come by after May 18, and a further 50 

people end up being told that they’re not eligible for the procedure after that 

point. Remember that Kressel has already been paid $250 by each of those 

people, and doesn’t need to repay the money if he finds them ineligible. 

Those 50 people still get their refunds from Groupon — a total of $25,000. But 

in this case, all of that $25,000 comes out of Groupon’s share of the revenues, 

and none of it comes out of Kressel’s cut. 

So what’s the situation on September 19, when the deal expires? 240 coupons 

will have been sold, for an up-front total of $120,000. 70 of those coupons will 

have been refunded, bringing total revenues down by $35,000 to $85,000. And 

of those revenues, Kressel will have received $55,000, while Groupon will 

have received just $30,000 — a 65/35 split in favor of the merchant, rather 

than the 50/50 split originally envisioned. 

And in fact it’s possible for Groupon to lose money on the deal, if there are 

enough refunds after May 18. 

“How Groupon Accounts For Its Deals,” Reuters.com, April 3, 2012, available at: 

http://blogs.reuters.com/felix-salmon/2012/04/03/how-groupon-accounts-for-its-deals/. 

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(4) Groupon’s declining reserve ratio was inconsistent with its growing 

refund expense. 

96. In addition to being derived from grossly deficient data and impaired by 

materially weak internal processes and inexperienced personnel, Groupon’s purported estimate 

of future refunds varied substantially from year-to-year, demonstrating an instability that is 

inconsistent with reasonable estimation under Topic 13 and SAB 104. From 2009 to 2011, the 

amount of gross billings that Groupon reserved for future refunds declined precipitously from 

8.6% to 1.79% to 0.94%, before the Company admitted that the latter estimate was unreliable 

and adjusted it upwards to 1.69%:

(#s in thousands) 2009 2010 2011 as reported12 2011 as adjusted

Gross Billings 34,082 745,348 4,002,506 3,985,501

Refund Reserve 2,932 13,398 37,452 67,452

Percent reserved 8.6% 1.79% 0.94% 1.69%

[Sources: Registration Statement; 2011 10-K; Feb. 8, 2012 Press Release; Mar. 30, 2012 8-K.] 

As Professor Dye explained, these variances demonstrate that Groupon did not have the stable 

refund experience it claimed: 

For most companies, growth in sales is accompanied by commensurate growth 

in the components of working capital related to those sales, including 

receivables, inventories and allowances for doubtful accounts, and for 

companies providing a right of refund, accrued reserves for refunds. Changes 

in a company’s accrued reserves for refunds that are not commensurate with 

changes in sales are by definition irreconcilable with a stable relationship 

between refunds and sales. Instead, such variation suggests that a company 

has experienced substantial changes in the mix of goods or services offered, 

 

12 The refund reserve used in connection with the blatantly incorrect financial results that 

Groupon reported on February 8, 2012 was not broken out as a line item in the press release. 

However, when Groupon announced revised results on March 30, 2012, it stated that its refund 

reserve of 67.452 million was an increase of approximately 30 million over the previous figure. 

Accordingly, the February 8, 2012 report apparently reflected a refund reserve of approximately 

37.452 million. 

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the classes of customers it targets, its refund reserve accrual rate, or the volume 

of refund requests received (or some combination of the preceding). 

The variations in Groupon’s refund reserve ratio further demonstrate that Groupon did not 

possess a stable historical refund experience, and could not possibly extrapolate its limited prior 

experience into a credible estimate for reserve accrual under SAB Topic 13. 

97. Moreover, while Groupon was slashing the amount of gross billings it retained in 

its refund reserve, its refund expense was skyrocketing. Full details regarding Groupon’s refund 

expense are not publicly available because Groupon omitted disclosure of these figures in the 

Registration Statement and its 2011 10-K; however, figures provided in an exhibit to a letter to 

SEC staff indicate that Groupon had an emerging refund problem at least as early as June 2011. 

In a September 16, 2011 letter to the SEC, Groupon indicated that its refund expense jumped 

over 10,000% from the first six months of 2010 to the first six months of 2011, from $227,000 to 

$23.7 million. See Letter of September 16, 2011 Letter of Groupon to SEC, available at: 

http://www.sec.gov/Archives/edgar/data/1490281/000104746911008103/filename1.htm#toc_ge7

9808_1. 

(5) Groupon could not timely and reliably estimate refunds. 

98. As Groupon admitted after the Class Period, it did not maintain sufficient controls 

to accurately record and assess its reserve for refunds, and the estimations it did make were not 

reliable. See 2011 10-K for 2011 at 104; Paragraphs 125-126 below. Thus, it did not possess the 

capability to make “reliable estimates of refunds ... on a timely basis,” as required by Topic 13 

and SAB 104. 

99. In addition to lacking proper procedures, Groupon’s internal controls were further 

hampered by inexperienced personnel. Groupon’s Registration Statement only hinted at the 

problem: 

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 Our management team has worked together for only a limited period of time 

and has a limited track record of executing our business plan as a team. We 

have recently filled a number of positions in our senior management and 

finance and accounting staff. Accordingly certain key personnel have only 

recently assumed the duties and responsibilities they are now performing. 

Registration Statement at 27. However, confidential witnesses have explained that the problems 

were far worse than the Company had initially represented. CW 2 said that Groupon “had a 

bunch of kids in accounting who didn’t know what they were doing.” He said the Company’s 

accounting department was overwhelmed by the number of deals Groupon was doing, and, as a 

result, the whole record-keeping process was behind. 

100. CW 5 confirmed that Groupon’s accounting department was overwhelmed at the 

time of the IPO. CW 5 was a temporary employee retained as an accounting assistant for 

Groupon between October 2011 and March 2012. Her job was to manually download sales and 

refund data from Groupon’s Salesforce.com database13 that it used to manage sales into an Excel 

spreadsheet, where it was reconciled manually and uploaded for payment into the Company’s 

Great Plains accounting software. CW 5 said that the Company had become so busy by the fall 

of 2011 that its accounting department fell behind on reconciling merchant payments and 

refunds. 

101. CW 6 confirmed the lack of controls in Groupon’s accounting department, where 

he was employed as a temporary worker from February 2012 to May 2012. CW 6 said that the 

backlog in the accounting department was so severe that 30 to 40 temporary workers were hired. 

Many lacked accounting or finance backgrounds, instead having degrees in areas like film and 

sociology. According to CW 6, they “were like a bunch of kids.” He was surprised by their 

inexperience. “There seemed to be no system of checks and balances,” he said. 

 

13 Salesforce.com is an enterprise grade software product that Groupon used to document and 

manage its relationships with merchant partners, and monitor the performance of deals and 

trends within its business on a realtime basis. 

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(6) Groupon’s consideration of reviews was improper and did not cure its 

lack of real historical refund data. 

102. Groupon impermissibly attempted to cure its lack of significant historical refund 

data for virtually all of its merchant partners by relying on “online and offline research of 

customer reviews of merchants.” See Registration Statement at 17. However, these unverified 

and often anonymous reviews could not substitute for actual refund data under authoritative 

guidance and are not reliable. First, nothing in SEC or FASB guidance recognizes “reviews” to 

be valid evidence from which refund estimates can be modeled. Second, academic research 

indicates that such reviews are often inflated and unreliable, resulting in higher reported 

satisfaction ratings than those that Groupon subscribers report for the same institutions: 

In their most recent study, [Boston University Professor John] Byers and his 

co-authors, Michael Mitzenmacher and Giorgos Zervas, theorize that "reviews 

from Groupon subscribers are lower on average because such reviews 

correspond to real, unbiased customers, while the body of reviews on Yelp 

contain some fraction of reviews from biased or even potentially fake sources." 

“Using Groupon Deals? Your Yelp Score May Suffer,” Huffington Post, April 11, 2012 (also 

noting that the study, which analyzed over 7 million Yelp reviews, found a 12% disparity 

between ratings by Groupon users and overall ratings). Third, if anything, the online reviews 

refuted the notion that Groupon’s deal quality – and to the extent that reflected refund rates, the 

refund rate – remained stable over time. Instead, the reviews suggested that Groupon was doing 

deals with more and more lower-quality merchants in 2011, a factor that would increase not 

decrease refund requests: 

Have you had the feeling the quality of Groupon deals is going down? If so, 

you’re right. A report released this morning by Giorgos Zervas, a postdoctoral 

fellow of computer science at Yale University, shows that the average rating of 

a Groupon merchant before a deal runs is declining as Groupon matures. 

Zervas and other researchers had shown earlier that a business’s individual 

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Yelp14 ratings dropped after running a Groupon. Yelp ratings by Groupon 

customers were, on average, 10% lower than those of their peers. (Disclosure: I 

met Zervas after the initial study and offered my theory that the average Yelp 

rating of merchants featured would be declining.) 

Zervas looked at deals in New York, Boston, San Francisco, and Seattle. The 

analysis was based on nearly 12,000 deals that ran from January 1, 2010 to 

March 31, 2012. 

“The slope of the trend line is negative in all four cases; indicating Groupon 

deal quality is, on average, decreasing over time,” Zervas wrote. “In all four 

cases, the correlation between time and expected Yelp rating is negative, and 

statistically significant.” 

The study also looked specifically at low-rated deals, defined as those with 

three or fewer stars on Yelp. “Low-rated deals appear to be increasing in 

frequency,” Zervas wrote. 

“Study: Groupon’s Merchant Quality Is On The Downslide,” VentureBeat, May 14, 2012, 

available at: http://venturebeat.com/2012/05/14/study-groupons-merchant-quality-is-on-thedownslide/#F8y71QCGMKemKPMU.99.15 

 (7) Groupon vouchers were subject to long refund periods which 

obscured determination of future refunds. 

103. The Groupon Promise entitled voucher purchasers that redeemed their vouchers at 

any time prior to expiration to receive a full refund if unsatisfied, or if availability restrictions 

(travel vouchers) or medical qualifications (e.g., LASIK or cool sculpting vouchers) prohibited 

the vouchers from being successfully redeemed. As a result, Groupon’s refund period often 

 

14 Yelp is a leading provider of online local search and reviews, on its website, www.yelp.com, 

and its mobile applications for iPhones and Android-based smartphones. 

15 Groupon’s deal quality also deteriorated internationally in 2011. In 2011, Britain’s 

Advertising Standards Authority ruled against Groupon fifty separate times, including violations 

for offering “breast enhancement” that did not work and for misrepresenting the actual price of 

goods to hide the fact that the voucher it was offering was not actually a discount. See “Groupon 

Breaches ASA Code for 49th and 50th Time In 2011,” The Guardian, December 7, 2011, 

available at: http://www.guardian.co.uk/technology/2011/dec/07/groupon-breaches-asa-code. 

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extended six to nine months, and sometimes more – another factor that FAS 48 recognizes as an 

impediment to making a reasonable return estimate. 

104. Each of the impediments outlined in Sections VI(b)(1) to VI(b)(7) alone was 

sufficient to render a refund estimate unreasonable and unreliable. Together, these factors 

unquestionably demonstrated that Groupon was incapable of reasonably determining its refund 

rate. 

VII. Groupon Recklessly Or Intentionally Continued Its Improper Accounting In Its 

Fourth Quarter 2011 Earnings Announcement.

105. By the time that Groupon announced Q4 2011 earnings on February 8, 2012, 

Groupon and its executives had actual knowledge or recklessly disregarded information known 

within Groupon and accessible to its executives indicating that their refund estimate was 

unreliable and was not accurately tracking Groupon’s actual refund experience. 

106. First, they had access to both sales and refund data in real time, and would 

therefore know when that data deviated from their unreliable and unreasonable estimate. As CW 

1 indicated, the growing refund rate was reflected in Groupon’s Salesforce database program. 

Defendants Mason, Del Preto, and Child each had access to Groupon’s Salesforce program, and 

regularly utilized information from that program in the course of their job duties. Additionally, 

CW 7, a Product Manager and Senior Executive in charge of Groupon Goods between 

November 2011 and July 2012, indicated that Groupon’s senior executives also received weekly 

analytics and trend reports further parsing the data from Salesforce. The reports were generated 

by a dedicated data analytics team in Palo Alto, California. 

107. Through these reports, by January 2012, Defendants Mason, Del Preto, Child (and 

Defendant Groupon, through these executives and other employees and agents working within 

the scope of their duties, including sales and customer service managers, and the data analytics 

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team described in Paragraph 106 above), would have known, or in the alternative, recklessly 

ignored that 2011 vouchers were being refunded at an elevated rate. 

108. Second, Groupon and its executives had actual knowledge prior to the IPO that 

Groupon’s ability to accelerate revenue was predicated on its ability to satisfy the strict 

requirements for accruing a reasonable refund estimate under SAB Topic 13. See Paragraph 79. 

These Defendants also knew, or recklessly ignored, that Groupon could not satisfy the 

requirements of SAB Topic 13. See Paragraphs 80 to 104. Specifically, Groupon and its 

executives knew, from access to information about the range and metrics of deals that Groupon 

offered, and from metrics regarding merchant partners referenced in investor presentations, that 

most of Groupon’s deals in Q4 2011 were with merchants that were either new, or with which 

Groupon had only a limited experience, in virtually all cases far less than the two years 

referenced in SAB Topic 13 and SAB 104. 

109. Third, Groupon and its executives knew, or recklessly ignored, that Groupon was 

making a concentrated push into higher-priced sales, which Mason understood to have an 

inherently higher refund rate. See Paragraph 90. Reflecting the shift into higher-priced deals, 

the Registration Statement that both Defendants Mason and Child signed showed that the 

average deal price rose substantially in the first nine months of 2011. It states that Groupon sold 

30,296,070 vouchers in 2010 for gross billings of 745,348,000, suggesting that the average deal 

price in 2010 was $24.60. However, for the first nine months of 2011, the average deal price 

rose almost 20% to $29.42 (93,629,524 vouchers sold for gross billings of $2,754,633,000). See 

Registration Statement at 50. Thus, even before the end of the calendar year, Defendants knew 

that Groupon had shifted to a deal mix emphasizing higher-priced deals with the “inherently” 

higher refund rate. 

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110. Fourth, Groupon and its executives knew, or recklessly ignored, that Groupon’s 

Q4 2011 revenues included substantial sales of vouchers for medical services like LASIK and 

cool sculpting, and expressly understood that such sales had a higher “expected” and “pre-bakedin” refund rate because Groupon did not screen to determine whether its customers were 

qualified for these medical services. In particular, Groupon’s disastrous experiment in early 

2011 with LASIK deals confirmed that the refund rate was substantial. See Paragraphs 90 to 92 

above. 

111. Fifth, Groupon and its executives also had actual knowledge, or recklessly 

ignored, that they had not yet implemented effective estimation controls and other internal 

controls. Groupon executives Mason and Child in particular knew this to be the case because 

they were in charge of implementing those controls, and by the time Groupon filed its 10-K only 

seven weeks later, would have to certify under law that those controls were effective. 

112. Sixth, Groupon and its executives knew that they were maintaining a refund 

reserve cushion that was far less, relative to its burgeoning sales, than it maintained in prior 

years, and had no reasonable basis for reducing its reserve ratio. See Paragraph 96. 

113. Seventh, in addition to all of the internal data warning of a severe refund risk, 

Groupon also received external warnings. In September 2011, tech analyst Rakesh Agrawal 

asked Groupon’s public relations department to address what he perceived to be a substantial 

refund risk going forward, and was falsely assured by Groupon that “refunds weren’t an issue.” 

See “Why Groupon Is Poised For Collapse,” VentureBeat, March 31, 2012, available at: 

http://venturebeat.com/2012/03/31/why-groupon-is-poised-for-collapse/. 

114. Despite their actual or constructive knowledge of growing refund risk, 

unreliability of reserve estimates, and their lack of qualification under GAAP to recognize 

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revenues before the refund period expired, Groupon and its executives continued to improperly 

accelerate revenue recognition. On February 8, 2012, these Defendants announced purportedly 

“strong” inflated financial results for the Q4 2011 and full year 2011 that were premised on its 

then-obviously defective refund accounting. See February 8, 2012 Press Release and February 8, 

2012 8-K, which was signed by Defendant Child. 

115. In the February 8, 2012 Press Release, Groupon continued to improperly 

accelerate recognition of revenue subject to a right of refund, even though it knew that its refund 

model was incapable of reasonably estimating actual refund rates. Because of this improper 

refund accounting, Groupon was able to report strong fourth quarter revenues and, to the delight 

of analysts, an operating profit. According to the February 8, 2012 Press Release, Groupon’s Q4 

2011 revenue increased 194% to $506.5 million, as compared against $172.2 million in the 

fourth quarter of 2010. For Full-Year 2011, it reported revenue of $1.62 billion, up 419% from 

$312.9 million in 2010. The February 8, 2012 Press Release also touted purported Q4 2011 

operating income of $15 million, as compared with an operating loss of $336.1 million in the 

fourth quarter of 2010. It boasted: “[t]his marks the company’s first quarter of operating 

profitability since Groupon began its international operations in the second quarter of 2010.” For 

Full-Year 2011, it reported operating loss of $203.4 million, down from a loss of $420.3 million 

in 2010. 

116. The representations described in Paragraph 115 above were materially false and 

misleading when made because: (a) the revenue figure was inflated by inclusion of revenue that 

was required to be deferred under GAAP because it was derived from the sales of vouchers 

unconditionally guaranteed under the Groupon Promise, but for which Groupon was incapable of 

generating a reasonable estimate of refunds; (b) Groupon had not earned an “operating profit” 

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but instead only created the illusion of one by falsely inflating revenues and using an unreliable 

estimate of future refunds instead of properly deferring revenue as required under GAAP; (c) the 

statements omitted that Groupon’s refund assumptions were not reasonable and materially 

understated its refund rate; (d) the statements omitted that Groupon had shifted to a deal mix 

emphasizing higher-priced travel, medical and aesthetic deals which had higher refund rates not 

accounted for in Groupon’s “refund estimate,” further rendering it unreliable; and (e) the 

statements omitted that Groupon had material weakness in its internal controls for closing 

accounting periods, calculating key accounting metrics, and, most importantly, estimating 

refunds. 

117. On the earnings conference call that Groupon held with investors later in the day 

on February 8, 2012, Defendant Mason stated that 

2011 was a phenomenal year for Groupon. At $1.6 billion in revenue, we grew 

nearly 420% this year....Q4 in particular, was a milestone, as it was the first 

quarter in which we have generated operating profit since expanding 

internationally back in Q2 2010. Quarter-over-quarter, we also saw revenue 

accelerate by 18% to $506.5 million.

These statements were materially false and misleading when made because: (a) the revenue 

figure was inflated by inclusion of revenue that was required to be deferred under GAAP 

because it was derived from the sale of vouchers unconditionally guaranteed under the Groupon 

Promise, but for which Groupon was incapable of generating a reasonable estimate of refunds; 

(b) Groupon had not earned an “operating profit” but instead only created the illusion of one by 

falsely inflating revenues and using an unreliable estimate of future refunds instead of properly 

deferring revenue as required under GAAP; (c) the statements omitted that Groupon’s refund 

assumptions were not reasonable and materially understated its refund rate; (d) the statements 

omitted that Groupon had shifted to a deal mix emphasizing higher-priced travel, medical and 

aesthetic deals which had higher refund rates not accounted for in Groupon’s “refund estimate,” 

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further rendering it unreliable; and (e) the statements omitted that Groupon had material 

weakness in its internal controls for closing accounting periods, calculating key accounting 

metrics, and, most importantly, estimating refunds. 

118. On that same February 8, 2012, conference call, Defendant Child stated 

Fourth quarter worldwide revenue, which is defined as the portion of gross 

billings that we keep after paying our merchants, grew 194% year-over-year to 

$506.5 million.... Fourth quarter gross billings and revenue were reflective of 

strong growth in our daily deals business and in our new travel, entertainment, 

and e-commerce channels. Strength in daily deals was reflected in part by the 

increase in revenue margin, or revenue as a percentage of gross billings, on a 

quarter-over-quarter basis....Fourth quarter GAAP operating income improved 

to $15 million from a loss of $336.1 million in the fourth quarter of 2010. 

These statements were materially false and misleading when made because: (a) the revenue 

figure was inflated by inclusion of revenue that was required to be deferred under GAAP 

because it was derived from the sale of vouchers unconditionally guaranteed under the Groupon 

Promise, but for which Groupon was incapable of generating a reasonable estimate of refunds; 

(b) Groupon had not earned an “operating profit” but instead only created the illusion of one by 

falsely inflating revenues and using an unreliable estimate of future refunds instead of properly 

deferring revenue as required under GAAP; (c) the statements omitted that Groupon’s refund 

assumptions were not reasonable and materially understated its refund rate; (d) the statements 

omitted that Groupon’s new deal mix, emphasizing higher-priced travel, medical and aesthetic 

deals, had higher refund rates not accounted for in Groupon’s “refund estimate,” further 

rendering it unreliable; and (e) the statements omitted that Groupon had material weakness in its 

internal controls for closing accounting periods, calculating key accounting metrics, and, most 

importantly, estimating refunds. 

119. Later in February, 2012, Defendant Del Preto put Defendants Child and Mason 

on actual notice that Groupon’s internal controls were broken, warning them that refunds were 

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coming in at a far faster pace than the number they had used to derive the revenue and operating 

profit figures reported to investors. See “SEC Probes Groupon,” The Wall St. Journal, April 3, 

2012. 

120. Despite actual knowledge that Groupon’s financials were predicated on an 

unreasonable earnings estimate, neither the Company nor Defendants Mason or Child made any 

effort to correct their earlier material misrepresentations. To the contrary, in a presentation he 

made at a Barclays Capital investors conference on March 13, 2012, Defendant Child reiterated 

earlier material misrepresentations. He stated that the daily deal business continued to be “very, 

very strong in all categories,” and again boasted that Groupon had achieved a fourth quarter 

operating profit, despite having been told by Defendant Del Preto weeks earlier that the 

extremely aggressive refund assumptions underpinning its financial reporting had been 

definitively proven false. 

121. The statements identified in Paragraph 120 above were materially false and 

misleading when made because: (a) Groupon had not earned an “operating profit” but instead 

only created the illusion of one by properly accelerating revenues in violation of GAAP and 

using an unreasonable, lowball estimate of future refunds that materially understated its refund 

rate; (b) the statements omitted that Groupon had material weakness in its internal controls for 

the closing of accounting periods, the calculation of key accounting metrics, and the estimation 

of refunds; and (c) Groupon’s results were not “very, very strong in all categories;” to the 

contrary, some categories were experiencing significantly elevated levels of refunds, which 

Child knew at the time he made these statements. 

 

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VIII. Groupon Discloses That Its Refund Accounting Was Improper And Unreliable. 

122. Groupon kept its accounting violations hidden for as long as it could. However, 

SEC rules required Groupon to file its audited annual report on Form 10-K on or before March 

30, 2012. Accordingly, in the late afternoon on March 30, 2012, Groupon issued a press release 

(the “March 30, 2012 Press Release”) announcing a significant revision of its reported financial 

results for its Q4 2011 and Full-Year 2011, filed the March 30, 2012 Press Release with the SEC 

as an attachment to the March 30, 2012 8-K, and filed its 2011 10-K. 

123. The March 30, 2012 Press Release and the March 30, 2012 8-K disclosed that the 

financial results reported on February 8, 2012 were erroneous and that the internal controls 

described in the Registration Statement and Prospectus were deficient. Specifically, the 

Company revised all of the following financial metrics: 

a. Revenues. Groupon’s Q4 2011 and Full-Year revenue were revised downward by 

$14.3 million. 

b. Operating income. Directly negating the Company’s prior boasts about Q4 2011 

being its first quarter of operating profitability, Groupon’s Q4 2011 operating income was 

changed to an operating loss of $15 million. Full-Year 2011 operating loss was also revised to 

$233.4 million. 

c. Operating expenses. Groupon’s total operating expenses were revised upward to 

$507.1 million in Q4 2011 and $1.84 billion for Full-Year 2011. 

d. Cost of revenue. Groupon’s cost of revenue was revised upward to $96.3 million 

for Q4 2011 and $258.9 million for Full-Year 2011. 

 e. Pro-forma net income (loss) / Earnings per share. Groupon’s Q4 2011 pro-forma 

net loss was revised to $32.5 million, which translated into a larger pro-forma loss of $0.06 per 

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share. The Company’s Full-Year 2011 pro-forma net loss was also revised to $284.4 million, 

which equated to a larger pro-forma loss of $0.79 per share. 

124. The March 30, 2012 Press Release attributed these revisions primarily to a gross 

underestimation of refunds: 

The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 

million. The revisions also resulted in an increase to fourth quarter operating 

expenses that reduced operating income by $30.0 million, net income by $22.6 

million, and earnings per share by $0.04.... 

The revisions are primarily related to an increase to the Company’s refund reserve 

accrual to reflect a shift in the Company’s fourth quarter deal mix and higher 

price point offers, which have higher refund rates. The revisions have an impact 

on both revenue and cost of revenue. 

125. The March 30, 2012 Press Release also disclosed that the Company’s outside 

auditor determined that Groupon’s internal controls were materially weak: 

In conjunction with the completion of the audit of Groupon’s financial statements 

for the year ended December 31, 2011 by its independent auditor, Ernst & Young 

LLP, the Company included a statement of a material weakness in its internal 

controls over its financial statement close process in its Annual Report on Form 

10-K for year ended December 31, 2011. The Company has been working for 

several months with another global accounting firm in preparation for reporting 

on the effectiveness of its internal controls by the end of 2012, as required 

following Groupon’s initial public offering last year. The Company continues to 

implement process improvement initiatives and augment its staffing, and is 

expanding the accounting firm’s engagement scope to address the underlying 

causes of the material weakness. Further discussion of the material weakness can 

be found in the Company’s Form 10-K, filed today with the SEC. 

126. The 2011 10-K confirmed that Groupon’s management, including Defendants 

Mason and Child, had also found material weaknesses in internal controls, especially those 

regarding estimation of refunds, calculation of accurate financial results, and proper 

reconciliation of accounts: 

Our management, with the participation of our Chief Executive Officer and our 

Chief Financial Officer, evaluated the effectiveness of our disclosure controls and 

procedures as of December 31, 2011. The term “disclosure controls and 

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procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities 

Exchange Act of 1934, as amended (the “Exchange Act”), means controls and 

other procedures of a company that are designed to ensure that information 

required to be disclosed by a company in the reports that it files or submits under 

the Exchange Act is recorded, processed, summarized and reported, within the 

time periods specified in the SEC's rules and forms. Disclosure controls and 

procedures include, without limitation, controls and procedures designed to 

ensure that information required to be disclosed by a company in the reports that 

it files or submits under the Exchange Act is accumulated and communicated to 

the company's management, including its principal executive and principal 

financial officers, as appropriate to allow timely decisions regarding required 

disclosure. Management recognizes that any controls and procedures, no matter 

how well designed and operated, can provide only reasonable assurance of 

achieving their objectives and management necessarily applies its judgment in 

evaluating the cost benefit relationship of possible controls and procedures. Based 

on this evaluation, management concluded as of December 31, 2011 that our 

disclosure controls and procedures were not effective at the reasonable 

assurance level due to a material weakness in our internal control over 

financial reporting, which is described below. 

In connection with the preparation of our financial statements for the year 

ended December 31, 2011, we concluded there is a material weakness in the 

design and operating effectiveness of our internal control over financial 

reporting as defined in SEC Regulation S-X. A material weakness is a

deficiency, or a combination of deficiencies, in internal control over financial 

reporting such that there is a reasonable possibility that a material misstatement 

of the annual or interim financial statements will not be prevented or detected 

on a timely basis. The primary factors contributing to the material weakness, 

which relates to our financial statement close process, were: 

• We did not maintain financial close process and procedures that were 

adequately designed, documented and executed to support the accurate 

and timely reporting of our financial results. As a result, we made a 

number of manual post-close adjustments necessary in order to prepare 

the financial statements included in this Form 10-K. 

• We did not maintain effective controls to provide reasonable assurance 

that accounts were complete and accurate and agreed to detailed 

support, and that account reconciliations were properly performed, 

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reviewed and approved. While these activities should be performed in the 

ordinary course of our preparing our financial statements, we instead 

needed to undertake significant efforts to complete reconciliations and 

investigate items identified in those reconciliations during the course of 

our financial statement audit. 

• We did not have adequate policies and procedures in place to ensure 

the timely, effective review of estimates, assumptions and related 

reconciliations and analyses, including those related to customer 

refund reserves. As noted previously, our original estimate disclosed on 

February 8 of the reserve for customer refunds proved to be inadequate 

after we performed additional analysis. 

127. Analysts and the business press criticized the Company both for the actual GAAP 

violation and for the fact that the Company’s lack of controls and candor made it difficult to trust 

Groupon going forward. For instance: 

a. On March 30, 2012, an analyst at Susquehanna Financial Group commented to 

Reuters, “When you’re a public company, there’s a certain level of expectations for financial 

controls. It’s probably because it’s such a fast growing business that it doesn’t have all the 

systems in place. Maybe they don’t have enough financial personnel.” 

b. On April 2, 2012 Ascendiant Capital Markets issued a report rating Groupon as 

Sell. As the report noted: 

Restatement and lack of controls presents more uncertainty: In our view, the 

Q4 restatement and weakness in controls are likely to bolster the pervasive 

skepticism as to the company’s valuation, growth prospects, and profit potential. 

Profitability has already been weak, and higher refund levels will further 

challenge this. We question whether Groupon can sustain its high growth and 

begin to generate sizeable profits while scaling back marketing and other 

operating costs. 

 c. Also on April 2, 2012, The Wall St. Journal quoted the head of financial reporting 

policy for the CFA Institute, an organization that represents chartered financial analysts who 

work with individual investors, questioning whether Groupon was competent to report as a 

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public company: “It really demonstrates, for an IPO, were they really ready to go? Did they 

have the financial systems, did they have the processes and procedures in place?” The same 

article quoted an Evercore Partners analyst concluding that Groupon’s admissions were “going to 

definitely unsettle a lot of investors.” 

d. The New York Times’ Deal Book called the restatement “unexpected” and said 

that it “raised questions about the accounting practices of the newly public company.” It added 

that the material weakness disclosure “highlights current concerns about the reliability of 

Groupon’s financial statements.” 

e. On April 2, 2012, The Wall St. Journal reported, “The surprise announcement 

raised questions about the reliability of Groupon’s numbers at a moment when it is trying to 

build confidence of Wall Street investors.” 

128. As a direct and proximate result of Groupon’s revelations, Groupon’s stock price 

fell $3.10, or 16.9%, from $18.38 to $15.28. 

129. The following day, The Wall St. Journal reported that the SEC had commenced 

an informal probe into Groupon’s accounting disclosures, sending shares down another $.26, or 

1.7%, to $15.02.

CLASS ACTION ALLEGATIONS 

130. Plaintiff brings this action as a class action pursuant to Fed. R. Civ. P. 23(a) and 

(b)(3) on behalf a Class consisting of: (a) all persons or entities who purchased or otherwise 

acquired the common stock of Groupon pursuant and/or traceable to the IPO between November 

4, 2011 through and including March 30, 2012 (the “Securities Act Class Period”); and (b) all 

persons who purchased or otherwise acquired the common stock of Groupon between February 

8, 2012 through and including March 30, 2012 (the “Exchange Act Class Period”). Excluded 

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from the Class are Defendants herein, the officers and directors of the Company, 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. 

131. The Class members are so numerous that joinder of all is impracticable. 

Groupon’s IPO involved the sale of 35 million shares of its common stock, which throughout the 

Class Period were actively traded on the NASDAQ. While the exact number of Class members 

is unknown to Plaintiff at this time and can be ascertained only through appropriate discovery, 

Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Record 

owners and other members of the Class may be identified from records maintained by Groupon 

or its transfer agent, BNY Mellon. Class members may be notified of the pendency of this action 

by mail, using the form of notice similar to that customarily used in securities class actions. 

132. Plaintiff’s claims are typical of the claims of the Class members, as all are 

similarly affected by Defendants’ wrongful conduct in violation of federal securities law that as 

alleged herein. 

133. Plaintiff will fairly and adequately protect the interests of the Class members and 

has retained counsel competent and experienced in class and securities litigation. Plaintiff has no 

interests antagonistic to or in conflict with those of the Class. 

134. Common questions of law and fact exist as to all Class members and predominate 

over any questions solely affecting individual Class members. Among the questions of law and 

fact common to the Class are: 

 whether the Securities Act was violated by the Registration Statement and 

Prospectus filed herein; 

 whether statements made by Defendants in the Registration Statement and 

Prospectus misrepresented and omitted material facts about the business, 

operations, financial performance, management, and internal controls of 

Groupon; 

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 whether the Exchange Act was violated by misrepresentation whether the 

Individual Defendants caused Groupon to issue false and misleading 

statements during the Class Period; 

 whether the February 8, 2012 Press Release, February 8, 2012 8-K, and 

conference call representations quoted herein contained material 

misrepresentations and omissions in violation of the Exchange Act; 

 whether material misrepresentations and omissions made in the Exchange Act 

Class Period caused losses for Exchange Act Sub-class members; and 

 whether the Class members have sustained damages and, if so, what is the 

proper measure of damages, for misrepresentations made in the Exchange Act 

Class Period. 

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

adjudication of this controversy since joinder of all Class members is impracticable. 

Furthermore, as the damages suffered by individual Class members may be relatively small, the 

expense and burden of individual litigation make it impossible for Class members to individually 

redress the wrongs done to them. There will be no difficulty in the management of this action as 

a class action. 

136. With respect to Plaintiff’s Exchange Act claims, Plaintiff will rely, in part, upon 

the presumption of reliance established by the fraud-on-the-market doctrine in that: 

 Defendants made public misrepresentations or failed to disclose material facts 

during the Exchange Act Class Period; 

 the omissions and misrepresentations were material; 

 Groupon common stock is traded in efficient markets; 

 the Company’s shares were liquid and traded with moderate to heavy volume 

during the Exchange Act Class Period; 

 the Company traded on the NASDAQ, and was covered by multiple analysts; 

 the misrepresentations and omissions alleged would tend to induce a 

reasonable investor to misjudge the value of the Company’s securities; and 

 Plaintiffs and Class members purchased and/or sold Groupon common stock 

between the time the Defendants failed to disclose or misrepresented material 

facts and the time the true facts were disclosed, without knowledge of the 

omitted or misrepresented facts. 

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137. Based upon the foregoing, Plaintiff and the Class members are entitled to a 

presumption of reliance upon the integrity of the market during the Exchange Act Class Period. 

CLAIMS FOR RELIEF 

COUNT I

(Against All Defendants) 

For Violation of Section 11 of the Securities Act 

138. Plaintiff repeats and realleges allegations 1 to 104 and 122 to 137 above. 

Allegations contained in paragraphs 105 to 121 are expressly not part of this claim. This claim is 

premised on strict liability under Section 11 of the Securities Act, and does not assert that 

Defendants acted with fraudulent intent. 

139. This claim is asserted by Plaintiff against all Defendants on behalf of all persons 

who acquired shares of the Company's common stock pursuant to and/or traceable to the 

Company’s November 4, 2011 IPO, in which the shares registered under the Registration 

Statement were sold. 

140. The Individual Defendants are strictly liable under the Securities Act as 

signatories of the Registration Statement for the misrepresentations and omissions contained 

therein, as identified in Paragraphs 59 to 104 above. Defendants Lefkofsky, Mason, Efrusy, 

Leonsis and Schultz are further strictly liable under the Securities Act for misrepresentations and 

omissions in the Registration Statement because they were directors of the Company at the time 

of its filing. 

141. Groupon is strictly liable as the Issuer under the Securities Act for the 

misrepresentations and omissions it made in the Registration Statement, as identified in 

Paragraphs 59 to 104. 

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142. The Underwriter Defendants are strictly liable under the Securities Act as named 

underwriters for the misrepresentations and omissions made in the Registration Statement, as 

identified in Paragraphs 59 to 104. 

143. None of the Defendants named herein conducted a reasonable investigation or 

possessed a reasonable basis for the belief that the statements contained in the Registration 

Statement and identified in Paragraphs 59 to 104 above were true, were without omissions of 

material fact, and were not misleading. 

144. By reason of the conduct alleged herein, each of the Defendants has violated 

Section 11 of the Securities Act. 

145. Plaintiff and the Class have sustained enormous damages because the value of 

their Groupon common stock has declined precipitously. 

146. At the time of their purchases, Plaintiff and the Class were without knowledge of 

the wrongful conduct alleged herein, and could not have reasonably discovered those facts more 

than one year prior to the filing of the initial complaint in this action. The initial complaint was 

filed within three years of the time that Groupon first offered the shares covered by the 

Registration Statement to the investing public. 

147. By virtue of the foregoing, Plaintiff and the other Class members are entitled to 

damages under Section 11 as measured by the provisions of Section 11(e), from the Defendants 

and each of them, jointly and severally. 

COUNT II 

(Against the Underwriting Defendants) 

For Violations of Section 12(a)(2) of the Securities Act 

148. Plaintiff repeats and realleges allegations 1 to 104 and 122 to 137 above. 

Allegations contained in paragraphs 105 to 121 are expressly not part of this claim. This claim is 

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premised on the remedies available under Section 12 of the Securities Act, and does not assert 

that Defendants acted with fraudulent intent. 

149. This claim is asserted by Plaintiff against the Underwriting Defendants, on behalf 

of all persons who acquired shares of the Company's common stock pursuant to the November 4, 

2011 IPO. 

150. By means of the Registration Statement and Prospectus, each of the Underwriter 

Defendants offered, promoted, and sold Groupon common stock in the IPO, and therefore was 

liable under Section 12(a)(2) for the misrepresentations and omissions contained in the 

Prospectus and repeated in the Registration Statement. 

151. None of the Underwriter Defendants named herein conducted a reasonable 

investigation or possessed a reasonable basis for the belief that the statements contained in the 

Registration Statement and Prospectus, and identified in Paragraphs 59 to 104 above were true, 

were without omissions of material fact, and were not misleading. 

152. By reason of the conduct alleged herein, each of the Underwriter Defendants has 

violated Section 12(a)(2) of the Securities Act. 

153. Plaintiff and the Class have sustained enormous damages because the value of 

their Groupon common stock has declined precipitously. 

154. Plaintiff and the Class hereby tender their shares to the Underwriter Defendants 

and demand rescission. 

155. At the time of their purchases, Plaintiff and the Class were without knowledge of 

the wrongful conduct alleged herein, and could not have reasonably discovered those facts more 

than one year prior to the filing of the initial complaint in this action. The initial complaint was 

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filed within three years of the time that the Underwriter Defendants first sold Groupon shares to 

the investing public. 

COUNT III 

(Against the Individual Defendants) 

For Violation of Section 15 of The Securities Act 

156. Plaintiff repeats and realleges allegations 1 to 104 and 122 to 137 above. 

Allegations contained in paragraphs 105 to 121 are expressly not part of this claim. This claim is 

premised on control person liability under Section 15 of the Securities Act, and does not assert 

that Defendants acted with fraudulent intent. 

157. The Individual Defendants, by virtue of their offices, directorship and specific 

acts were, at the time of the wrongs alleged herein and as set forth herein, controlling persons of 

Groupon within the meaning of Section 15 of the Securities Act. The Individual Defendants had 

the power and influence and exercised the same to cause Groupon to engage in the acts described 

herein. 

158. Specifically, the Audit Committee Defendants, by virtue of their obligation to 

oversee financial reporting, acted as control persons of Groupon and its executive defendants, 

Mason, Del Preto and Child, in connection with the materially false and misleading financial 

statements and notes thereto, and misrepresentations regarding Groupon’s financial reporting 

controls, contained in the Registration Statement. 

159. Defendants Lefkofsky and Mason, as the Executive Chairman and Chief 

Executive Officer, respectively, exercised control by virtue of their positions over Groupon, and 

Defendants Del Preto and Child, their subordinates. 

160. Defendant Child exercised control by virtue of his postion over Groupon and his 

subordinate, Defendant Del Preto. 

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161. Defendant Del Preto exercised control by virtue of his position over the financial 

reporting of Groupon. 

162. The Individual Defendants’ positions made them privy to and provided them with 

actual knowledge of the material facts concealed from Plaintiff and the Class. 

163. By virtue of the conduct alleged herein, the Individual Defendants are liable as 

control persons for the violations of Section 11 by the persons they controlled, as alleged in 

Count I. 

164. None of the Individual Defendants named herein conducted a reasonable 

investigation or possessed a reasonable basis for the belief that the statements contained in the 

Registration Statement and identified in Paragraphs 59 to 104 above were true, were without 

omissions of material fact, and were not misleading. 

165. Each of the Individual Defendants is liable to Plaintiff and the Class for damages 

suffered as a result of the Securities Act violations of the persons they controlled. 

COUNT IV 

(Against Defendants Groupon, Mason and Child) 

For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder 

166. Plaintiff repeats and realleges the allegations contained in Paragraphs 1 to 137 

above, as if fully set forth herein. 

167. This Count is asserted against all Defendants and is based upon Section 10(b) of 

the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC. 

168. Between at least February 8, 2012 through March 30, 2012, Defendants Groupon, 

Mason and Child engaged in a plan, scheme, conspiracy and course of conduct, pursuant to 

which they knowingly or recklessly engaged in acts, transactions, practices and courses of 

business which operated as a fraud and deceit upon Plaintiff and the other Class members; made 

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various untrue statements of material facts and omitted to state material facts necessary in order 

to make the statements made, in light of the circumstances under which they were made, not 

misleading; and employed devices, schemes and artifices to defraud in connection with the 

purchase and sale of securities. Such scheme was intended to, and, during this time period, did: 

(i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; 

(ii) artificially inflate and maintain the market price of Groupon common stock; and (iii) cause 

Plaintiff and other Class members to purchase Groupon common stock at artificially inflated 

prices. 

169. Specifically, with reckless disregard for or actual knowledge of the falsity of their 

financial accounting, Defendants Groupon, Mason and Child each reported false financial results 

for Q4 2011 in the February 8, 2012 Press Release, the February 8, 2012 8-K, and the February 

8, 2012 earnings conference call, and in the case of Defendants Groupon and Child, in a 

presentation at a Barclays investor conference, and omitted material adverse information 

regarding weaknesses in Groupon’s internal controls therein, as is detailed in Paragraphs 105 to 

121 above. 

170. As detailed in Paragraphs 105 to 122 above, these statements were false and 

misleading, inter alia, because they misrepresented Groupon’s revenue and operating results, 

predicated their aggressive revenue recognition on an unreliable and unreasonable assumption of 

refund rates in violation of accounting standards they knew and understood to be authoritative, 

omitted that Groupon had material weakness in its process for assuming future refund rates and 

calculating financial results, and omitted that Groupon’s financial reporting violated GAAP. 

171. By virtue of their positions at Groupon, information, and access to records 

detailed in Paragraphs 105 to 121 above, Defendants Mason and Child each either had actual 

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knowledge of the materially false and misleading nature of the Class Period representations 

alleged in Paragraphs 105 to 121 above, or, in the alternative, acted with reckless disregard for 

the truth in that they ignored information readily available to them indicating the materially false 

and misleading nature of the statements made. 

172. Scienter is imputed as to the corporation, Groupon, from the actual and 

constructive knowledge, including reckless disregard for the truth, of Defendants Mason, Child, 

Del Preto, and other employees acting in the course of their employment, including those in 

Groupon’s public relations department who were expressly warned of Groupon’s refund risk in 

September 2011 as set forth in Paragraph 113. 

173. Without knowledge of the adverse facts concerning Groupon that were concealed 

by Defendants Groupon, Mason and Child, Plaintiff and the other Class members purchased 

Groupon common stock at artificially inflated prices between February 8, 2012 and March 30, 

2012, and relied upon the price of the common stock, the integrity of the market for the common 

stock, and/or upon statements disseminated by Defendants Groupon, Mason and Child, and were 

damaged thereby. 

174. During the Class Period, and specifically during the portion thereof beginning on 

February 8, 2012 and ending on March 30, 2012, Groupon securities were traded on an active 

and efficient market. 

175. Plaintiff and the other members of the Class, relying on the materially false and 

misleading statements described herein made by Defendants Groupon, Mason and Child between 

February 8, 2012 and March 30, 2012, and/or relying upon the integrity of the market, purchased 

shares of Groupon common stock at prices artificially inflated by the material misrepresentations 

and omissions alleged in Paragraphs 105 to 121 above. Had Plaintiff and the other Class 

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members known the truth, they would not have purchased Groupon’s common stock or would 

not have purchased it at the inflated prices that were paid. 

176. The market price of Groupon common stock declined sharply upon public 

disclosure of the true facts misrepresented during the Class Period, disclosure of the material 

adverse information concealed during the Class Period, and/or materialization to the risks 

concealed by Class Period misrepresentations. 

177. By reason of the conduct alleged herein, Defendants Groupon, Mason and Child 

knowingly or recklessly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated 

thereunder. 

178. As a direct and proximate result of the wrongful conduct by Defendants Groupon, 

Mason and Child, Plaintiff and the other Class members suffered damages in connection with 

their respective purchases and sales of Groupon’s common stock during the Class Period. 

Defendants Groupon, Mason and Child are liable to Plaintiff and the Class for these damages. 

COUNT V

(Against the Audit Committee Defendants, Lefkofsky and Mason) 

For Violations of Section 20(a) of the Exchange Act 

179. Plaintiff repeats and realleges the allegations contained in Paragraphs 1 to 137 and 

166 to 178 above, as if fully set forth herein. 

180. During the Class Period, and in particular the portion thereof beginning on 

February 8, 2012 and March 30, 2012, the Audit Committee Defendants, by virtue of their 

directorships and obligations under the audit committee charter to oversee financial reporting and 

internal controls, were control persons of Groupon, Mason and Child within the meaning of 

Section 20(a) of the Exchange Act, and are liable under Section 20(a) for their violations of 

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 

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181. During the Class Period, Defendants Lefkofsky and Mason, by virtue of their 

positions, respectively, as Executive Chairman and Chief Executive Officer, were control 

persons of Groupon and Defendant Child, their subordinate, within the meaning of Section 20(a) 

of the Exchange Act, and are liable under Section 20(a) for Groupon’s and Child’s violations of 

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 

PRAYER FOR RELIEF 

WHEREFORE, Plaintiff demands judgment against Defendants as follows: 

A. Determining that the instant action may be maintained as a class action under 

Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class 

representative; 

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; 

C. Awarding Plaintiff and the other Class members prejudgment and post-judgment 

interest, as well as their reasonable attorneys’ fees, expert fees and other costs; 

D. Awarding rescissionary damages; and 

E. Awarding such equitable, injunctive or other relief as this Court may deem just 

and proper. 

DEMAND FOR TRIAL BY JURY

 Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff hereby demands 

trial by jury of all issues that may be so tried. 

Dated: October 29, 2012 

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74 

POMERANTZ GROSSMAN HUFFORD 

DAHLSTROM & GROSS LLP 

 

By: /s/ Joshua B. Silverman 

Joshua B. Silverman 

Patrick V. Dahlstrom 

Louis C. Ludwig 

10 South LaSalle Street, Suite 3505 

Chicago, Illinois 60603 

Phone: 312-377-1181 

Fax: 312-377-1184 

jbsilverman@pomlaw.com 

pvdahlstrom@pomlaw.com 

lcludwig@pomlaw.com 

POMERANTZ GROSSMAN HUFFORD 

DAHLSTROM & GROSS LLP 

Marc I. Gross 

Jeremy A. Lieberman 

Matthew L. Tuccillo 

600 3rd Avenue, 20th Floor 

New York, New York 10016 

Phone: 212-661-1100 

Fax: 212-661-8665 

CAFFERTY CLOBES MERIWETHER 

& SPRENGEL LLP 

Dom J. Rizzi 

30 North LaSalle Street, Suite 3200 

Chicago, Illinois 60602 

Phone: 734-769-2144 

Fax: 734-769-1207 

BRONSTEIN GEWIRTZ & 

GROSSMAN LLC 

Peretz Bronstein 

Edward N. Gewirtz 

Neil D. Grossman 

60 East 42nd Street, Suite 4600 

New York, New York 10165 

Phone: 212-697-6484 

Fax: 212-697-7296 

Counsel for Plaintiff and the Class

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