IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

LAZAR MACOVSKI, individually and on )

behalf of all others similarly situated, )

)

Plaintiff, )

)

vs. ) Case No. 20 C 2581

)

GROUPON, INC., RICH WILLIAMS, and )

MELISSA THOMAS, )

)

Defendants. )

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

On behalf of himself and others, Lazar Macovski brought this securities fraud 

case after shares he purchased in Groupon, Inc. lost significant value. Under the 

Private Securities Litigation Reform Act, Fadi E. Rahal was appointed to serve as Lead 

Plaintiff. See 15 U.S.C. § 78u-4(a)(3)(B)(i). The Court will refer to the plaintiff as 

"Rahal" even though he was not the party who initially filed the complaint.

At the heart of this suit are two alleged omissions of material adverse 

information: (1) the performance of Groupon's Select program; (2) the Company's 

performance in a subcategory of its sales called "Goods." Rahal blames his shares'

loss in value on the alleged omissions. He accuses Groupon, its former chief executive 

officer, Richard Williams, and its then interim chief financial officer, Melissa Thomas, of 

misleading investors by knowingly omitting the adverse information.

Rahal brings two claims, both under the Securities Exchange Act: fraud under 
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section 10(b) and vicarious liability for fraud under section 20(a). The defendants

(Thomas, Williams, and Groupon) assert that Rahal's amended complaint fails to state a 

claim and therefore move to dismiss. For the reasons stated below, the Court grants 

that motion.

Background

The following facts are drawn from Rahal's amended complaint. Because the 

Court is considering a motion to dismiss, the Court accepts as true the well-pleaded 

factual allegations in Rahal's complaint and views those allegations in the light most 

favorable to Rahal. See Menzies v. Seyfarth Shaw LLP, 943 F.3d 328, 332 (7th Cir. 

2019).

A. Groupon's business model and recent "headwinds"

Groupon is an e-commerce marketplace that connects consumers to merchants. 

At the time the relevant events occurred, Groupon competed in three markets: (1) 

"Local" (e.g., local services, events, and activities sold by Groupon but provide by a 

third-party merchant); (2) "Goods" (i.e., merchandise sold directly to customers), and (3) 

"Travel" (i.e., hotels, airfare, and package travel deals). Of the three, Local deals were 

the Company's primary profit driver. Though Local only made up 40 percent of 

Groupon's consolidated revenues, it generated 73 percent of the Company's 

consolidated gross profits. Conversely, though Goods sales made up 55 percent of 

Groupon's total revenue, it represented only 20 percent of gross profits. 

Despite its low margins, Goods had value beyond its profits because it drew 

customers to other parts of Groupon's platform where they could view and purchase the 

Company's higher-margin offerings, especially Local deals. In other words, even 
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though Local was Groupon's main profit driver and that market was the one with the 

greatest opportunity for growth, the Company believed Goods—even with its smaller 

profit margins—was necessary as an "engagement driver" for its other products. See 

Amd. Compl. ¶¶ 29, 33. As Williams explained during Groupon's Q4 2018 conference 

call with analysts and investors in February 2019: "Goods has been a good, solid 

engagement driver for us over the years . . . . And our focus with Goods has just been 

making it more and more efficient and driving more gross profit . . . . But we're just 

trying to build a good quality business there that continues to engage customers and 

help us bridge to this vision of a broader Local focus marketplace." Id. ¶ 34 (emphasis 

omitted). 

These customer cross-shopping opportunities were especially important for 

Groupon, as the Company was—and had for years been—"experiencing severe 'traffic 

headwinds,'" i.e., decreases in "its principal marketing channels (email and search 

engine marketing)." Id. ¶ 3; see id. ¶¶ 4, 26. Also distressing was the fact that the 

Company had for years been facing a stubborn decline in its active customer count. 

B. Groupon's focus on increasing customers' purchase frequency

In response to these "headwinds," Groupon settled on a strategy of increasing 

existing customers' purchase frequency. As Williams explained in a letter to 

shareholders in 2019, at that point, "increasing purchase frequency and total unit 

volume [were] more important . . . than . . . customer counts," because increased 

purchase frequency and total unit volume would "unlock the leverage in [Groupon's] 

model and an ability to profitably invest in growth." Id. ¶ 36 (emphasis omitted). 

One way Groupon tried to increase purchase frequency was through Groupon 
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Select, a paid membership program. The way the Select program worked was that, in 

exchange for a monthly membership fee, Groupon customers who joined the program

received discounts on products in addition to other benefits. Groupon hoped that 

Select, along with other "product enhancements" and "initiatives," would be "important 

drivers for increasing customer purchase frequency and growing . . . business over 

time." Id. ¶ 73 (emphasis omitted). The Company cautioned, however, that "gross 

profit and operating income may be adversely impacted in the near term" as a result of 

its focus on "driving" these strategic initiatives. Id.

Throughout the class period, the defendants shared positive reports about 

Select's rollout and performance. In a July 30, 2019 letter to shareholders, Williams 

said that Select's early "indicators [were] very positive with significantly improved 

purchase frequency, higher average order value and increased customer propensity to 

search for things to eat, see, do and buy." Id. ¶ 40 (emphasis omitted). In the 

subsequent Q2 2019 conference call with analysts and investors, Groupon asserted 

that Select was profitable and that it would "almost double the average gross profit per 

customer" that Groupon generated at that point. Id. ¶ 42 (emphasis omitted). 

In a November 4, 2019 letter to shareholders, Williams indicated that Groupon 

was "pleased" with Select's "results to date," noting that the program had attracted more 

than 260,000 members. Id. ¶ 45 (emphasis omitted). Williams said that he and others 

were encouraged by how Select's members behaved, and he told shareholders that the 

Company's metrics showed a "60 percent increase in purchase frequency and a 20 

percent jump in average order value" among the program's members. See id.

(emphasis omitted). Still, Williams observed that these results were "early" and that the 
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Company was "still analyzing" them as the first Select members had only barely 

completed their first year in the program. Id. He further noted that Groupon had "work 

to do to fully build out the infrastructure necessary for Select to run at scale." Id.

In the subsequent Q3 2019 conference call with analysts and investors, 

Groupon's executives repeated many of the positive points about Select and reasserted 

its profitability. For example, Thomas said "It's still early days, but we're seeing member 

acquisition costs payback within six months; and payback has been driven by both the 

recurring revenue from membership fees as well as incremental gross profit generated 

on membership-related transactions." Id. ¶ 46 (emphasis omitted). Similarly, Williams, 

in a December 11, 2019 Barclays conference presentation, shared that Select's margins 

were "such that [Groupon made money] on the units . . . [and] on the membership fees 

as well. So, the total economics of the program are really compelling." Id. ¶ 48

(emphasis omitted). 

C. Groupon's financial guidance for 2019

Before and throughout the class period, Groupon made statements "specifying 

certain financial results expected for upcoming periods," i.e., the Company's financial 

guidance or outlook. Id. ¶ 49. These statements were made in the Company's 

quarterly press releases, results presentations, and conference calls. Groupon's 

outlook was principally expressed through a figure known as its adjusted projected 

EBITDA—earnings before interest, taxes, depreciation, and amortization. In 2019, 

Groupon's adjusted projected EBITDA—first provided in February of that year—was 

$270 million. The 270-million-dollar figure was reiterated and reaffirmed when the 

Company announced its first, second, and third quarter results for 2019. 
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D. Groupon shutters Select and exits the Goods marketplace

In February 2020, Groupon announced two decisions. The first was that the 

Company would exit the Goods category and instead focus on Local experiences. The 

Company explained in its Q4 2019 letter to shareholders that "[m]idway through the 

fourth quarter it became abundantly clear" that Groupon was not able to compete 

"effectively in Goods." Id. ¶ 107 (emphasis omitted). Data showed "far fewer 

customers engag[ing] with Goods in the fourth quarter than . . . anticipated, which 

impacted overall traffic to [the] site." See id. (emphasis omitted). Lower traffic to the 

site caused lower performance in all of Groupon's categories.

Of course, Goods had been a troubled area for some time ("for four quarters"). 

See id. (emphasis omitted). As indicated earlier, the Company justified its continued 

competition in the market because Goods had been an engagement driver for other 

categories, primarily Local. Id. (emphasis omitted). However, by this time Groupon had 

"seen engagement with . . . Goods inventory shift meaningfully lower, driven in large 

part by [the Company's] inability to compete in [this] fiercely competitive . . . retail 

landscape." Id. (emphasis omitted). In short, because Goods was "no longer 

generating the cross-shopping behavior or customer activation activity" to justify further 

investment, Groupon's executives determined that "Goods ha[d] outlived its role as a 

business driver" and instead had "become a significant drag." Id. (emphasis omitted). 

Williams gave similar explanations for the decision during the Q4 2019 conference call

with analysts and investors.

The second decision announced in February 2020 was that Groupon would

"discontinue new enrollments" in the Select program. Id. ¶ 114. As with the Goods 
7

decision, the Company explained the move to shutter Select in its Q4 2019 letter to 

shareholders and on the Q4 2019 conference call with analysts and investors. The Q4 

2019 letter stated that Select "added to [the Company's] challenges in [Q4 2019]" 

because Select's benefits began "appealing disproportionately to customers purchasing 

goods" rather than those "transacting on [the Company's] local platform." Id. ¶ 113

(emphasis omitted). As a result, Select "pressured margins and drove higher than 

anticipated customer acquisition costs." Id. (emphasis omitted). After it became aware 

of these facts, Groupon determined that Select could not provide the return on 

investment "needed for it so be a key priority", as the program did not "address the core 

of [Groupon's] product or business model, nor [did it] overcome the limitations in the 

legacy Groupon business." See id. (emphasis omitted).

On the Q4 2019 conference call, Thomas added that Select "was expected to be 

net neutral to gross profit in the fourth quarter, but the program underperformed 

because—in addition to the problems discussed in the letter to shareholders—there was

"a lower than expected number of enrollees converting to paid members." Id. ¶ 114

(emphasis omitted). 

E. Groupon's shares decline

Following the disclosures of these decisions, Groupon's shares—which had 

closed on February 18, 2020 at $3.05 per share—fell $1.35 (nearly 44 percent of 

Group's market capitalization) and closed the next day at $1.70 per share. On February 

19, over 155 million Groupon shares traded hands, more than 25 times Groupon's 

average daily trading volume during the Class Period.
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Discussion

Defendants move to dismiss the complaint under Federal Rule of Civil Procedure 

12(b)(6) for failure to state a claim. "A motion under Rule 12(b)(6) tests whether the 

complaint states a claim on which relief may be granted." Richards v. Mitcheff, 696 

F.3d 635, 637 (7th Cir. 2012). To survive such a motion, the complaint "must (1) 

describe the claim in sufficient detail to give the defendant fair notice of the claim and 

[the] grounds on which it rests and (2) contain sufficient factual matter, accepted as 

true, to state a claim to relief that is plausible on its face." Cornielsen v. Infinium Cap. 

Mgmt., LLC, 916 F.3d 589, 598 (7th Cir. 2019) (citation omitted) (internal quotation 

marks omitted). A complaint's factual allegations "must be enough to raise a right to 

relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007).

In addition to the standard under Rule 12(b)(6), the Court must also consider the 

heightened pleading requirements imposed by Federal Rule of Civil Procedure 9(b). 

See Cornielsen, 916 F.3d at 598 ("Heightened pleading requirements apply to 

complaints alleging fraud."). Under Rule 9(b), a party alleging fraud or mistake "must 

state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 

9. The Seventh Circuit has said that Rule 9(b) requires a plaintiff to provide "precision 

and some measure of substantiation to each fraud allegation." Menzies, 943 F.3d at 

338 (internal quotation marks omitted). The court has stated that a plaintiff satisfies 

Rule 9(b) when he pleads "the who, what, when, where, and how of the alleged fraud." 

Id. (internal quotation marks omitted).

There is one further standard to consider. In securities fraud cases, the Private 
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Securities Litigation Reform Act (PSLRA) imposes further pleading requirements. See 

Cornielsen, 916 F.3d at 599. Specifically, claims under the Securities Exchange Act 

must "specify each statement alleged to have been misleading, the reason or reasons 

why the statement is misleading, and, if an allegation regarding the statement or 

omission is made on information and belief, the complaint shall state with particularity all 

facts on which that belief is formed." 15 U.S.C. § 78u–4(b)(1). Additionally, the 

complaint must "state with particularity facts giving rise to a strong inference that the 

defendant acted with the required state of mind." 15 U.S.C. § 78u–4(b)(2)(A).

A. Section 10(b) claim

The bulk of the parties' briefs is devoted to discussing Rahal's claim under 

Section 10(b) of the Securities Exchange Act, which prohibits the unlawful "use or 

employ[ment], in connection with the purchase or sale of any security . . . any 

manipulative or deceptive device or contrivance in contravention of such rules and 

regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). SEC Rule 10b-5 

"implements" Section 10(b) of the Exchange Act. See West Palm Beach Firefighters'

Pension Fund v. Conagra Brands, Inc., No. 19 C 1323, 2020 WL 6118605, at *4 (N.D. 

Ill. Oct. 15, 2020). Rule 10b-5 prohibits any "untrue statement of a material fact or to 

omit to state a material fact necessary in order to make the statements made, in the 

light of the circumstances under which they were made, not misleading." 17 C.F.R. § 

240.10b-5(b).

To state a claim under Section 10(b) and Rule 10b–5, the plaintiff must allege 

"(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a 

connection between the misrepresentation or omission and the purchase or sale of a 
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security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) 

loss causation." See Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267

(2014) (internal quotation marks omitted).

1. Failure to plead with particularity 

The Court's consideration of the defendants' motion begins with the PSLRA's 

pleading requirements. The defendants argue that Rahal's complaint is a so-called 

"puzzle pleading" and therefore does not satisfy the PSLRA's particularity requirements. 

In his response, Rahal contends that he has met the particularity requirements because 

his complaint is organized into sections and he clearly identifies the allegedly 

misleading statements.

Though the Seventh Circuit has never used the term "puzzle pleading," Hughes 

v. Accretive Health, Inc., No. 13 C 3688, 2014 WL 4784082, at *5 (N.D. Ill. Sept. 25, 

2014), many of this circuit's district courts have used that term to describe a complaint 

that would "require[ ] the Court and the defendant to piece together exactly which 

statements the [p]laintiffs are challenging and which allegations contradict those 

statements," rather than the complaint itself doing so. See Constr. Workers Pension 

Fund-Lake Cty. & Vicinity v. Navistar Int'l Corp., No. 13 C 2111, 2014 WL 3610877, at 

*5 (N.D. Ill. July 22, 2014). 

Courts have found so-called "puzzle pleadings" where the complaint "quotes the 

defendant at length and then uses a stock assertion that the statement is false or 

misleading for reasons stated in an earlier paragraph." See Alizadeh v. Tellabs, Inc., 

No. 13 C 537, 2014 WL 2726676, at *4 (N.D. Ill. June 16, 2014). Courts have also 

dismissed complaints whose "net effect" is to "leave the reader . . . jumping from page 
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to page in an attempt to link the alleged statements to the background that supposedly 

makes them false or misleading," especially where it is "difficult to discern where the 

supposedly challenged statements end and [ ] context or characterization begins." 

Conlee v. WMS Indus., Inc., No. 11 C 3503, 2012 WL 3042498, at *4 (N.D. Ill. July 25, 

2012).

These deficient complaints do not satisfy the PSLRA's pleading standards for a 

few reasons. The most obvious, in the context of securities fraud and the PSLRA, is 

that it "improperly places the burden on the Court to sort out the alleged 

misrepresentations and then match them with the corresponding adverse facts." 

Constr. Workers Pension Fund, 2014 WL 3610877, at *5 (alterations accepted) (internal 

quotation marks omitted). But the "greater cost" of these inadequate pleadings is that 

they may "lead to more expansive (and expensive) document production and 

unnecessarily lengthy depositions covering needless factual ground." Conlee, 2012 WL 

3042498, at *5 (N.D. Ill. July 25, 2012).

Here, Rahal has presented the Court with a 78-page, 177-paragraph complaint, 

of which about 34 paragraphs spanning over 23 pages are devoted to reciting the 

defendants' alleged misstatements and omissions in violation of the Exchange Act. See 

generally Amd. Compl. ¶¶ 66–100. Organized chronologically, Rahal excerpts 

statements made by Groupon, Williams, and Thomas in quarterly reports, conference 

calls, and SEC filings. See id. ¶¶ 66–94. These excerpts often take the form of long 

block quotes with portions of the quotes bolded for emphasis. Rahal says he has met 

the PSLRA's requirements and pinpointed the allegedly misleading statements because 

he has bolded the precise statements at issue and because the complaint is organized 
12

into clear sections. That's all well and good, but the mere fact that a complaint is 

somewhat well-organized does not mean it satisfies the PSLRA's pleading 

requirements.

The PSLRA requires a plaintiff to "specify each statement alleged to have been 

misleading." § 78u–4(b)(1). In the complaint, Rahal has inserted excerpts from investor 

communications that he says contain allegedly misleading statements. Portions of 

these excerpts are in bold typeface, but many of bolded excerpts in the complaint

include statements that Rahal cannot possibly be alleging are misleading 

representations (such as obviously benign statements and statements made by 

analysts rather than Groupon or its representatives). See id. ¶¶ 66-72, 75–82, 83–84, 

85–89, 90–94. In short, Rahal's liberal use of bold to emphasize statements is not very 

helpful in identifying, precisely, the materially misleading statements he is alleging were 

made. See Alizadeh, 2014 WL 2726676, at *4.

Even in the paragraphs where Rahal is purportedly giving his reasons for why the 

"above representations" were misleading, he does not identify—specifically—which of 

the representations are the misleading statements. As it stands then, he has left it to 

the defendants and to the Court to sort out the alleged misrepresentations and match 

them with the purportedly contrary facts. See Constr. Workers Pension Fund, 2014 WL 

3610877, at *5. The amended complaint is deficient for this reason.

In sum, Rahal has not met the burden required by the PSLRA. "It is of the 

utmost importance for Plaintiff to properly pinpoint what Defendants said that Plaintiff 

believes to have been unlawful." Rossbach v. VASCO Data Sec., Int'l Inc., No. 15-CV06605, 2018 WL 4699796, at *6 (N.D. Ill. Sept. 30, 2018). The section 10(b) claim is 
13

therefore dismissed because it is not adequately pleaded.

1

B. Section 20(a) claim

Because Rahal has failed to state a claim for his section 10(b) claim, he cannot 

sustain his section 20(a) claim, as the viability of the latter is reliant on the former. See 

Pugh v. Trib. Co., 521 F.3d 686, 693 (7th Cir. 2008) ("Thus, to state a claim under § 

20(a), a plaintiff must first adequately plead a primary violation of securities laws—here, 

a violation of § 10(b) and Rule 10b–5."). The Court therefore dismisses Rahal's section 

20(a) claim.

Conclusion

For the reasons stated above, the Court grants defendants' motion to dismiss 

[docket no. 48] and dismisses the amended complaint. Rahal has until May 19, 2021 to

file a motion for leave to amend that includes a proposed second amended complaint 

that meets the PSLRA's pleading requirements. The Court will then handle any further 

necessary briefing in the context of the motion for leave to amend. The case is set for a 

telephone status hearing on May 26, 2021 at 9:30 a.m. to set any necessary schedules 

for further proceedings, using call-in number 888-684-8852, access code 746-1053. 

Counsel should wait for the case to be called before announcing themselves. 

________________________________

MATTHEW F. KENNELLY

 United States District Judge

Date: April 28, 2021

1 Given this disposition, the Court need not address the parties' arguments about falsity, 

Item 303, scienter, or loss causation.