Opinion ID: 3048173
Heading Depth: 3
Heading Rank: 2

Heading: Statements at Issue

Text: Only two of the Defendants’ allegedly false or misleading statements were found on the pleadings to be actionable by the district court so as to survive the 42 Defendants’ motion to dismiss: (1) a February 23, 2005 conference call, and (2) a March 16, 2005 Form 10-K filing. The first allegedly actionable misstatement occurred on February 23, 2005, when Defendant Pisaris-Henderson (CEO) participated in a public conference call and said the following: In fact, during Q4, we intentionally removed numerous traffic sources that would otherwise have produced approximately $70K revenue per day. . . . Let me repeat, we have intentionally removed traffic sources from our distribution network that would otherwise have produced approximately $70K per day in top line revenue. Again, our focus is to deliver traffic that converts rather than just clicks alone. (Dkt. 39-9, Ex. F, at 17-18) (quoted in Compl. ¶ 87). The Plaintiffs allege that, in fact, no distribution partners were removed from the MIVA network in the fourth quarter of 2004. (Compl. ¶ 88). The second of the allegedly actionable fraudulent statements was made in MIVA’s Form 10-K annual report filed with the SEC on March 16, 2005. The 10- K was signed by Defendants Pisaris-Henderson (CEO) and Thune (COO), and its accuracy was certified pursuant to Sarbanes-Oxley by Pisaris-Henderson and thenCFO Brenda Agius. (See MIVA 10-K, filed Mar. 16, 2005, at 64 & Exs. 31.1- 32.2). In the 10-K, the Company made the following relevant statements about click fraud: 43 We do not rely on “spyware” for any purpose and it is not part of our product offerings . . . . .... From time to time, we receive fraudulent clicks on our ads . . . . We have implemented screening policies and procedures to minimize the effects of these fraudulent clicks. We believe that these policies and procedures assist us in detecting fraudulent click-throughs, which are not billed to our advertisers. .... . . . We have developed automated proprietary screening applications and procedures to minimize the effects of these fraudulent clicks. (MIVA 10-K, filed Mar. 16, 2005, at 17, 20, 44) (quoted in Compl. ¶¶ 89, 91). The Form 10-K also made the following representations regarding MIVA’s distribution partners: Expressed as a percentage of revenue, none of the traffic purchased from any of [MIVA’s] distribution partners represented over 10% of consolidated revenue in 2004. . . . In the second half of the fourth quarter of 2004, we ceased displaying advertisements with distribution partners and affiliates of distribution partners whose traffic did not adequately convert to revenue for our advertisers . . . . Measured at the end of the fourth quarter, the removal of these distribution partners reduced our average click-through revenue by approximately $70,000 per day . . . . We plan to continue our efforts to provide our advertisers with high quality Internet traffic . . . . We consider the removal of these distribution partners in the second half of the fourth quarter as ordinary to our business and in conformity with our long-stated goal of provided [sic] high quality traffic to our advertisers. (MIVA 10-K, filed Mar. 16, 2005, at 43-44) (quoted in Compl. ¶¶ 93, 95). The Plaintiffs allege that, in fact, MIVA’s network heavily relied on spyware and other 44 forms of click fraud to generate revenues, that almost one-third of MIVA’s 2004 revenue came from the illegitimate traffic generated by Saveli and Dmitri, and, again, that MIVA did not remove any distribution partners from its network in the fourth quarter of 2004. (Compl. ¶¶ 90, 92, 94, 96). Under the Plaintiffs’ theory of the case, the Defendants’ statements on February 23, 2005 and again on March 16, 2005 were materially misleading because the Defendants knowingly omitted information regarding the Company’s significant click fraud problems and resultant bid deflation (i.e., that MIVA’s advertisers were bidding less and less for clicks on their ads), and disclosure of this omitted information was “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); cf. Schleicher v. Wendt, 618 F.3d 679, 684 (7th Cir. 2010) (“[T]he [alleged] fraud . . . was the omission from public [disclosures] of information . . . , at a time when the omission of this news made other statements misleading or incomplete . . . .”). The Plaintiffs claim that the Defendants knowingly and intentionally continued to withhold from the market the truth about click fraud until May 5, 2005, when the Defendants finally revealed in a conference call that “a couple” of MIVA’s distribution partners had been employing “capabilities . . . to get additional traffic that just simply don’t adhere to 45 our standards” (Compl. ¶ 103), at which time MIVA’s share price precipitously dropped. Because the Defendants’ summary judgment motion contested only the elements of loss causation and damages, we accept (for present purposes only) the Plaintiffs’ allegations concerning the other elements of their Rule 10b-5 claim -- that is, that the Defendants made (1) materially false or misleading statements or omissions (2) with scienter, (3) upon which the Plaintiffs relied (4) in purchasing securities. Thus, for present purposes, our loss causation analysis assumes that the Defendants had a duty to reveal the truth about MIVA’s click fraud as early as February 23, 2005 in order to prevent the statements they made during the Class Period from being materially misleading.25