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r

2
ED ENTERED
3 LO DGED RECEIVED
4 KN
MAR 0 9 200I
5 AT SEATTLE
CLERK U. S. DISTRICT coum'
WESTERN DISTRICT OF WASHINGTON
6 or DEPUTY

8 UNITED STATES DISTRICT COURT


WESTERN DISTRICT OF WASHINGTON

Co
9

10
MAXINE MARCUS, On Behalf
Co1o S :L
11 of Herself and All Others : Civil Action No.
Similarly Situated,
12
Plaintiff, COMPLAINT - CLASS ACTION
13 FOR VIOLATION OF FEDERAL
-against- SEC IES LAWS
14
JEFFREY P. BEZOS, JOSEPH GALLI, JR.,
15 WARREN C. JENSON, and
AMAZON.COM, INC.,
16
Defendants.
17 ----------------------------------

18
Plaintiff, individually and on behalf of all other persons similarly situated, by her
19
undersigned attorneys, for her complaint, alleges upon personal knowledge as to herself and her own
20
acts, and upon information and belief as to all others matters, based upon the investigation made by and
21
through her attorneys, which investigation included, inter ia, a review of the public documents and
22
press releases of Amazon.com, Inc. ("Amazon" or the "Company"), news articles, and analyst reports
23
regarding the Company.
24
NATURE OF ACTION
25
1. Plaintiff brings this action as a class action on behalf of herself and all other persons,

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LIP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS Seattle, WA 98101
1 except defendants and certain related parties, who purchased or otherwise acquired the securities of

2 Amazon during the period February 2, 2000 through and including October 30, 2000 (the "Class

3 Period"), to recover damages caused by defendants' violations of the federal securities laws.

4 2. During the Class Period, defendants disseminated to the investing public false and

5 misleading financial statements in SEC filings and press releases concerning the Company's revenues,

6 investments in joint ventures, earnings, cash flow as well as its overall financial condition and future

7 prospects.

8 3. In particular, defendants touted the Company's investments in various joint ventures

9 called Amazon Commerce Network partners ("ACNs") and the purported high margin revenue stream

10 created by such ventures. Because of Amazon's ongoing operating losses, it was critical for the

11 Company to demonstrate to the market significant cash flow to offset such losses until the Company

12 became profitable. However, defendants failed to disclose until the end of the Class Period that: (a) the

13 ACN investments were losing millions of dollars; (b) much of the purported revenue recorded appeared

14 to investors as cash, but was actually in the form of highly speculative equity investments; and (c) the

15 revenues recognized under the ACN agreements made Amazon's losses appear less than they were and

16 distorted the Company's reported cash flow.

17 4. During the Class Period, Defendant Jeffrey Bezos sold 368,650 shares of the common

18 stock of Amazon at $54.24 on May 12, 2000 for proceeds of almost $20 million. In addition, defendants

19 completed an offering of Amazon convertible debt priced at greater than $680 million in February 2000.

20 5. During the Class Period, the Company improperly reported revenues from ACNs.

21 Defendants also boasted that present and future revenues pursuant to contracts with ACNs were to

22 exceed $500 million. Not until the end of the Class Period was it revealed that: (i) the operating losses

23 from ACNs were mounting; (ii) many of the ACN's were either in bankruptcy or on the edge of

24 bankruptcy; (iii) it was doubtful that the purported revenues could be realized; and (iv) the ACN

25 "agreements," which were never attached to SEC filings, were apparently not binding agreements but

subject egotiation at-any time, - - - - - -- - -- ---

27 CLASS ACTION COMPLAINT ZWERLING , SCHACHTER & ZWERLING , LLP


28 FOR VIOLATION OF 1904 Third Avenue , Suite 1030
FEDERAL SECURITIES LAWS 2 Seattle, WA 98101
i
1 6. As a result of these false and misleading statements, the market prices of the Company's

2 11 securities were artificially inflated during the Class Period.

3 7. However, after the close of trading on October 24, 2000, defendants announced that the

4 11 Company was the target of an informal investigation by the Securities and Exchange Commission (the

5 11 "SEC") regarding the accounting treatment and disclosures of the ACNs.

6 8. On October 30, 2000, buried in the Company' s Management ' s Discussion and Analysis

7 (the "MDA"), filed with the SEC on Form 10-Q for the quarter ended September 30, 2000 (the "2000

8 Third 10-Q"), defendants revealed that one of the Company's major ACNs , Living.com , declared

9 bankruptcy during the quarter ended September 30, 2000 and that during the nine months ended

10 September 30, 2000, the Company lost "$266 . 9 million of equity-method losses for investments in

11 ACN[s]." On the same day, the common stock of Amazon closed at $32.88 per share, down almost

12 nine percent from the previous day's close on heavy trading volume , and down more than 60 percent

13 from its Class Period high of $85 . 938 on February 3, 2000.

14 9. On March 9, 2001 , it was reported that defendant, Jeffrey P. Bezos, was being

15 investigated by the SEC for stock sales just before a negative analyst report was released concerning
16 Amazon' s reporting of cash flows, ACNs, and the Company's unlikely viability as a going concern. On

17 March 9, 2001, Amazon's stock price was trading around $ 12.00 per share.

18 RWSDICTION AND VENUE


19 10. Plaintiff brings this action pursuant to Sections 10(b) and 20 of the Securities Exchange

20 Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j, and 78t, and Rule IOb-5, 17 C.F.R. 240.1Ob-5
21 promulgated thereunder by the SEC.
22 11. This Court has jurisdiction in this action pursuant to Section 27 of the Exchange Act, 15

23 U.S.C. 78aa; and 28 U.S.C. 1331.


24 12. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28

25 U.S.C. 1391(b) and (c). Amazon' s corporate headquarters is located in this District. Thus, many

of the acts giving rise to the violations complained of herein, including the dissemination of false and

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LU'


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 3 Seattle, WA 98101
1 misleading information, occurred and had their primary effects in this District.

2 13. In connection with the acts, transactions and conduct alleged herein, defendants used the

3 means and instrumentalities of interstate commerce, including the United States mails, interstate

4 I telephone communications and the facilities of national securities exchanges and markets.

5 THE PARTIES
6 14. Plaintiff purchased shares of the Company's common stock during the Class Period on

7 11 the open market and was injured thereby, as attested to in the attached Certificate of Named Plaintiff

8 15. Defendant Amazon is a Delaware corporation with its principal executive offices at 1200

9 12' Avenue South, Suite 1200 , Seattle, Washington 98144. The Company is an online retailer offering

10 I items including books, music, DVD/Video, toys, electronics, software, and home products.

11 (a) Amazon's common stock trades on the National Association of Securities Dealers

12 Automatic Quotation System (the "NASDAQ"). At April 30, 2000, there were 351 ,774,236 shares of

13 the Company' s common stock issued and outstanding. Approximately 36 percent of such stock, or 127

14 million shares, were held by insiders . In addition, the Company had outstanding $680,685,000 of 6.875%

15 convertible subordinated notes due 2010 issued on February 16 , 2000 (the "PEACS"). The Company

16 maintains a Web site at www.Amazon.com where it disseminates investor information including annual

17 and quarterly reports filed with the SEC and earnings releases.

18 16. Defendant Jeffrey P. Bezos ("Bezos") has been the Chairman of the Board of the

19 Company since founding it in 1994, and Chief Executive Officer since May 1996. Bezos also became

20 President and Chief Operating Officer of the Company upon Joseph Galli, Jr.'s departure on July 25,

21 2000. As of February 28, 2000, Bezos beneficially owned 117,522,822 shares of the Company's

22 common stock. Because of Bezos' positions with the Company, he had access to adverse, non-public

2311 information about its business, finances, products, markets and present and future business prospects.
24 Bezos signed materially false and misleading statements filed with the SEC throughout the Class Period.

25 Defendant Bezos sold 368,650 shares ofthe common stock ofAmazon at inflated prices during the Class

possession of undisclosed material adverse information concerning the Company.

27 11 CLASS ACTION COMPLAINT ZWERLING , SCHACHTER & ZWERLING , LLP


28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 4 Seattle , WA 98101
17. Defendant Joseph Galli, 3r.("Galli') was the Company's President and Chief Operating

2 Officer and on the board of directors from June 1999 until his "resignation" on July 25, 2000. As of

3 February 29, 1999. Galli beneficially owned 1,369,684 shares of the Company's common stock.

4 Because of defendant Galli's position with the Company, at all relevant times hereto, he had access to

5 adverse, non-public information about its business, finances, products, markets and present and future

6 business prospects. Galli signed materially false and misleading statements filed with the SEC during

7 the Class Period.

8 18. Defendant Warren C. Jenson ("Jenson") was Chief Financial Officer and Senior Vice

9 President of the Company at all relevant times. As of February 29, 2000, Jenson beneficially owned

10 975,000 shares of Amazon common stock. Because of defendant Jepson's position with the Company,

11 he had access to adverse, non-public information about its business, finances, products, markets and

12 present and future business prospects. Jenson signed materially false and misleading statements filed

13 with the SEC during the Class Period.

14 19. The defendants listed in paragraphs 16 through 18 are referred to herein as the "Individual
15 ^ Defendants."
16 20 The Individual Defendants, as officers and directors of the Company, were controlling

17 persons of the Company within the meaning of Section 20(a) of the Exchange. Act. By reason of their

18 stock ownership and positions with the Company, they were able to and did, directly or indirectly, in

19 whole or in material part, control the content of public statements issued by or on behalf of the

20 Company. They participated in and approved the issuance of such statements made throughout the Class

21 Period, including the materially false and misleading statements identified herein.

22 21. By reason of their positions with the Company, the Individual Defendants had access to

23 internal Company documents, reports and other information, including the adverse non-public

24 information concerning the Company's services, financial condition, and future prospects, and attended
25 management and/or board of directors meetings. As a result of the foregoing, they were responsible for
of the Company's financial statements, public reports and releases

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 5 Seattle, WA 98101
1 described herein. In addition, the Individual Defendants knew of each specific agreement with the

2 ACN's, the nature and amount of equity received and the fact that Amazon received significantly less

3 cash for these transactions, than represented to the public.

4 22. Amazon and the Individual Defendants, as officers and directors of a publicly-traded

5 company, had a duty to promptly disseminate truthful and accurate information with respect to Amazon

6 and to promptly correct any public statements issued by or on behalf of the Company which had become

7 false or misleading.

8 23. The Individual Defendants and Amazon knew or recklessly disregarded the fact that the

9 misleading statements and omissions complained of herein would adversely affect the integrity of the

10 market for the Company's stock and would cause the price of the Company's common stock to become

11 artificially inflated. Each of the defendants acted knowingly or in such a reckless manner as to constitute

12 a fraud and deceit upon plaintiff and the other members of the Class.

13 CLASS ACTION ALLEGATIONS

14 24. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedures

15 23(a) and (b)(3) on behalf of a class consisting of all persons and entities who purchased or otherwise

16 acquired the Company's common stock during the period from February 2, 2000 through October 30,

17 2000 inclusive (the "Class Period"), and who suffered damages thereby (the "Class"). Excluded from

18 the Class are defendants, members of the Individual Defendants' families, any entity in which any

19 defendant has a controlling interest or is a part or subsidiary of or is controlled by the Company, and the

20 officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors and assigns

21 of any defendant.

22 25. The members of the Class are so numerous that joinder of all members is impracticable.

23 While the exact number of Class members is unknown to the plaintiff at this time and can only be

24 ascertained through appropriate discovery, plaintiff believes there are, at a minimum, thousands of

25 members of the Class who purchased the Company's common stock during the Class Period. The

24 -52 million shares of its common stock outstanding as of April 30, 2000.

27 CLASS ACTION COMPLAINT ZWERLING , SCHACHTER & ZWERLING , LIP


28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 6 Seattle, WA 98101
1 26. Common questions of law and fact exist as to all members of the Class and predominate
2 over any questions affecting solely individual members of the Class. Among the questions of law and

3 11 fact common to the Class are whether:

4 (a) the Federal securities laws were violated by defendants' acts as alleged herein;

5 (b) the Company issued false and misleading financial statements during the Class Period;

6 (c) the Individual Defendants caused the Company to issue false and misleading financial

7 N statements during the Class Period;

8 (d) defendants acted knowingly or recklessly in issuing false and misleading financial

9 statements;

10 (e) the market prices of the Company's securities during the Class Period were artificially

11 inflated because of defendants' conduct complained of herein; and


12 (f) the members of the Class have sustained damages and, if so, what is the proper

13 I measure of damages.

14 27. Plaintiff s claims are typical of the claims of the members of the Class as plaintiff and

15 members of the Class sustained damages arising out of defendants' wrongful conduct in violation of

16 Federal law as complained of herein.

17 28. Plaintiff will fairly and adequately protect the interests of the members of the Class and

18 has retained counsel competent and experienced in class actions and securities litigation. Plaintiff has

19 no interests antagonistic to or in conflict with those of the Class.


20 29. A class action is superior to other available methods for the fair and efficient adjudication

21 of the controversy since joinder of all members of the Class is impracticable. Furthermore, because the

22 damages suffered by the individual Class members may be relatively small, the expense and burden of

23 individual litigation makes it impracticable for the Class members individually to redress the wrongs

24 done to them. There will be no difficulty in the management of this action as a class action.

25

3^. ^ l] xelyr t rt .upon the presumption of reliance established by the fraud on

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 7 Seattle, WA 98101
1 I the market doctrine in that:

2 (a) defendants made public misrepresentations or failed to disclose material facts during
3 1 the Class Period;

4 (b) the omissions and misrepresentations were material;

5 (c) the securities of the Company traded in an efficient market;

6 (d) the misrepresentations and omissions alleged would tend to induce a reasonable

7 investor to misjudge the value of the Company' s securities; and

8 (e) plaintiff and members of the Class, who purchased the Company's stock during the

9 Class Period did so without knowledge of the omitted or misrepresented facts.

10

11 NO STATUTORY SAFE HARBOR


12 31. The statutory safe harbor provided for forward- looking statements under certain
13 circumstances does not apply to any of the false statements pleaded in this complaint, because: (a) either

14 none of the statements pleaded herein were identified as "forward-looking statements" when made; or

15 (b) such statements did not contain meaningful cautionary statements identifying important factors that

16 could cause actual results to differ materially from those in the statements accompany those statements.

17 To the extent that the statutory safe harbor does apply to any statements pleaded herein deemed to be

18 forward-looking, defendants are liable for those false forward-looking statements, because at the time

19 each of those statements was made the speaker actually knew the forward-looking statement was false

20 and/or the statement was authorized and/or approved by an executive officer of the Company, who

21 actually knew that those statements were false when made.

22

23 Background

24 32. During the Class Period Amazon made equity investments in certain Internet companies

25 while simultaneously entering into agreements to provide such entities with various services in exchange
26 Amazon sted its reported earnings during the Class Period

27 CLASS ACTION COMPLAINT ZWERLING, SCHACI-ITER & ZWERL ING, LLP


FOR VIOLATION OF 1904 Third Avenue , Suite 1030
28 FEDERAL SECURITIES LAWS 8 Seattle, WA 98101
by recording the receipt of inflated valued stock from affiliated entities as "high-margin" revenue.
2 33. Amazon made a series of equity investments in either private or public companies during

3 1999 and 2000, accounting for them under either the cost or equity method. In certain instances, the

4 Company simultaneously entered into agreements that permit such companies to promote their products

5 on Amazon ' s website and receive other types of services in exchange for a fee. These entities are part

6 of the ACNs. For the quarters ended March 31, 2000 and June 30, 2000, the Company reported $24.3

7 million and $ 19.9 million, respectively, as revenue from its ACNs, and $23 . 6 million and $19.5 million,

8 respectively, as gross profit.

9 34. At the beginning of the Class Period, defendants misled the investing public to believe

10 that Amazon agreed to receive payment for the services performed to ACN partners primarily or entirely

11 in cash instead of equity. Shortly, thereafter, the Company began accepting reduced future cash

12 payments, equity, and renegotiated shorter agreement terms. Moreover, in the event that the stock

13 received as payment either appreciated or depreciated, the amount the Company recorded as revenue

14 generally did not change from what was previously determined.

15 35. In fact, the Company recorded revenues and "gains" from Living.com, in which Amazon

16 I held a significant equity stake, even though Living.com was in dire financial condition, eventually filing
17 for Chapter 7 bankruptcy in August 2000.

18 36. In its filings with the SEC during the Class Period, defendants falsely represented that

19 its recognition of ACN related revenue was in accordance with Generally Accepted Accounting

20 Principles ("GAAP"), specifically, AICPA, Emerging Issues Task Force ("EITF") No. 00-8.

21 37. Defendants' SEC filings would repeat, in mantra-like fashion, selected portions of EITF

22 No. 00-8, as follows:

23 In March 2000, the EITF reached a consensus on EITF Issue 00-8. . ..


This consensus indicates that the grantee should measure the fair value
24 of equity instruments received in conjunction with providing goods or
services using the stock price and other measurement assumption as of
25 the earlier of either (a) the date the parties come to a mutual
understanding ofthe terms ofthe equity-based compensation arrangement
-and -comm tment formance . by- tie tee to earn the qa Lu
ity -
27 CLASS ACTION COMPLAINT zwERLING, SCHACHTER & ZWERLING, LLP
FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 9 Seattle, WA 98101
i
instruments is reached, or (b) the date at which the grantee's performance
necessary to earn the equity instruments is complete....
2
Unearned revenue is recognized over the period in which the service for
3 which consideration has been received is performed (generally one to 2.5
years).
4
38. However, what defendants' SEC filings failed to disclose was that the Company was
5
indeed not following EITF No. 00-8. The following statements that EITF No. 00-8 also makes, were not
6
repeated in the Company' s filings during the Class Period.
7
Par. 8. This Issue does not address when revenue is recognized.
8
9
Par. 10. In accordance with par. 28 of Opinion 29, the Task Force
10 observed that companies should disclose, in each financial statements, the
amount of the gross operating revenue recognized as the result of
11 nonmonetary transactions addressed by Issue 00-8. Further, the SEC
Observer reminded registrants of the requirement under Item 303(a)(3)(ii)
12 ofRegulation S-K to disclose known trends or uncertainties that have had
or that a registrant reasonably expects to have a materially favorable or
13 unfavorable impact on revenues.

14 39. Throughout the Class Period, defendants failed to disclose: (1) the agreements with its
15 E ACNs as exhibits to SEC filings as required by SEC Rule S-K, Item 601; (2) the fact that the agreements
16 apparently were readily subject to renegotiation; and (3) that there were significant contingencies

17 surrounding the realization of the revenues due to the lack of viability of many of the ACNs.

18 40. It was not until August 2000 that defendants began reporting the amount of the revenue

19 received as cash and the amount received as equity investments, and related losses of the ACNs.
20 Notwithstanding, Amazon continued to improperly recognize ACN revenue throughout the remainder

21 of the Class Period.


22 False and Misleading Statements During the Class Period

23 41. On February 2, 2000, Amazon Announced "Profitability in U.S.-Based Book Sales,


24 Financial Results for Fourth Quarter 1999."

25 Fueled by strong sales in its new consumer electronics store,


Amazon.com, Inc. (Nasdaq:AMZN) today announced that net sales for
_--the quarw of 9 zverd676 millions anincrease of 167 percent

27 CLASS ACTION COMPLAINT ZWERLING, SCHACIITBR & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 10 Seattle , WA 98101
i
1 over net sales of $253 million for the fourth quarter of 1998.
2

4
Net sales for all of 1999 were $1.64 billion, a 169 percent increase over
5 net sales of $610 million reported for all of 1998.

7 "This was our fastest sequential growth as a public company, and we are
grateful that so many customers chose Amazon.com for such; a broad
8 range of products," said Jeff Bezos, Amazon.com founder and CEO.

10 Amazon.com has invested in leading internet retailers that are improving


the lives of customers by making shopping easier and more convenient.
11

12

13 During the fourth quarter and so far in 2000, Amazon.com has announced
partnerships with Next Card, Ashfordcom, Greenlight.com, Audible, and
14 living . com, as well as an expanded drugstore.com partnership. In
aggregate, these partnerships represent more than $500 million in revenue
15 commitments to Amazon.com over the next five years.

1611 * *

17 42. The preceding statements were false and misleading because defendants knowingly or

18 with deliberate recklessness failed to disclose that:


19 (a) revenues and earnings were inflated due to the improper recognition of revenue from

20 investments in ACNs, because the ACNs were not econothically viable, and revenues receivable from

21 1 them were subject to significant contingencies;


22 (b) revenues from ACNs were not always payable in cash, but in many instances

23 substantial amounts were payable in the form of stock that in many instances was nonpublic or worth

24 less than the recorded value; and

251 (c) the preceding statements were also false and misleading for the reasons stated at
paragraphs 34-38.
27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP
FOR VIOLATION OF 1904 Third Avenue , Suite 1030
28 FEDERAL SECURITIES LAWS 11 Seattle , WA 9810
43. On February 3, 2000, an analyst for the Company' s investment banker issued a research

2 report indicating payment from the ACNs would be in the form of cash. The price of the Company's

3 common stock soared to an intraday high of $85.938 per share, closing at $84 .188 per share, on a

4 record 43.2 million shares traded, up from its previous day's close of $69.438.

5 44. On February 7, 2000, defendants announced "Plans to Issue Convertible Subordinated

6 1 Notes."

7 [Amazon] announced today that it would file a prospectus supplement


with the Securities and Exchange Commission to sell up to 600MM of
8 Euro Denominated Convertible Subordinated Notes Due 2010 (excluding
proceeds , if any, from the over-allotment option).
9
The notes and shares of the common stock of the company issuable upon
10 conversion of the notes are covered by the company's existing shelf
registration statement.
11
An underwriting group led by Morgan Stanley Dean Witter will market
12 the notes to the public.
13 45. On February 9, 2000, defendants filed with the SEC on Form 424B5, a Prospectus for
14 the PEACS (the "Prospectus"). Therein, the defendants touted its recent investments in ACNs and

15 represented that Amazon would receive a minimum of $362 million in revenues from these agreements.
16 On January 21, 2000, we announced that we had agreed to acquire 5% of
the outstanding shares of Greenlight.com, an online car buying service,
17 and warrants to increase our stake up to 30%. In connection with this
investment, we also announced that we had entered into a promotional
18 agreement with Greenlight.com. This agreement provides for the
payment of a minimum of $82.5 million to us over a five-year period.
19
On January 24, 2000, we announced that we had agreed to make an
20 additional $ 30 million investment in drugstore .com, an online retail and
information source for health, beauty, wellness, personal care and
21 pharmacy. This investment brings our total stake in drugstore.com to
approximately 28% ofthe outstanding drugstore .com common stock. We
22 also agreed to create a health and beauty store on the Amazon. com Web
site. Under the commercial agreement for this transaction, Amazon.com
23 will receive $ 105 million over a three-year period.

24 On January 31, 2000, we announced that we had agreed to acquire 5% of


Audible, Inc., a leader in Internet-delivered spoken audio for PC-based
25 listening or playback on AudibleReady (TM) portable digital audio
devices. In connection with this investment, we also announced that we
ha .into-an agreement to feature on the Amazon.com Web site

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LAP


FOR VIOLATION-OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 12 Seattle, WA 98 101
content and services from Audible, Inc. in exchange for payments of $30
million to us over a three-year period.
2
On February 1, 2000, we announced that we had agreed to acquire an
3 18% stake in living.com, an online retailer of products and services for
the home, with warrants for another 9%. In connection with this
4 investment, we also announced that we had entered into an agreement to
create a home living store on the Amazon.com Web site. Under the
commercial agreement for this transaction, Amazon.com will receive
$145 million from living.com over a five-year period.
6

7
46. The preceding statements were knowingly or deliberately recklessly false and misleading
8
for the reasons stated at paragraphs 34-38, 42. The preceding statements were also knowingly or
9
deliberately false and misleading, as defendants failed to disclose the agreements with the ACNs as
10
exhibits to any of Amazon's filings with the SEC during the Class Period.
11
47. On February 16, 2000, Amazon "Announce[d the] Closing of the Public Offering of 6
12
7/8% Convertible Subordinated Notes Due 2010.
13
[Amazon] announced today that it has closed a public offering of 690
14 million euros aggregate principal amount of its 6 7/8% Convertible
Subordinated Notes due 2010.
15
The notes were offered at par. The notes and shares of common stock of
16 the company issuable upon conversion of the notes are covered by the
company's existing shelf registration statement.
17
An underwriting group led by Morgan Stanley Dean Witter and including
18 Credit Suisse First Boston and Donaldson, Lufkin & Jenrette offered the
notes.
19

20 48. On March 29, 2000, the Individual Defendants caused the Company to file on Form 10-K

21 its annual report for the year ended December 31, 1999 (the "1999 10-K"). All of the Individual
22 Defendants signed the 1999 10-K.
23 49. The 199910-K repeated the same information as the February 2, 2000 Press Release and

24 also stated the following:


25 We believe that the [ACNs] will tend to increase gross margins in the
future because of the revenue associated with the activities conducted by
ACN enetPSuhstantiall er gms-profit# an the Com an 's sale
27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP
FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 13 Seattle, WA 98101
of products.
2 During 1999, the Company recorded approximately $5.8 million of
revenue associated with noncash transactions whereby the Company
3 received equity securities of other companies in exchange for advertising
and promotional services to be provided for a fixed period of time. The
4 Company recorded the fair value of the consideration on the date
received, $54.4 million, and is recognizing revenue ratably over the term
5 of the agreements as the advertising and promotional services are
provided.
6
50. The preceding statements were knowingly or deliberately recklessly false and misleading
7
for the reasons stated at paragraphs 34-38, 42.
51. On April 26, 2000, the Individual Defendants caused Amazon to "announce O] that net
9
sales for the first quarter of 2000 were $574 million, an increase of 95 percent over net sales of $294
10
million for the first quarter of 1999." The revenues reported below included the misleading ACN
11
revenues which were not entirely in cash as investors had been previously led to believe.
12
13
"We are pleased to report substantial growth and gross profit and
14 operating margin improvement this quarter," said Warren Jenson,
Amazon CFO. "Looking ahead, we expect our U.S. Books, Music and
15 DVD/Video segment to be profitable on a pro forma operating basis for
the fall year 2000. In addition, we believe that over the next three
16 quarters combined, Amazon will be operating cash flow positive
-enough, we expect, to more than cover our planned capital expenditures.
17 With the leading platform in online commerce, a global brand and scale,
and $1 billion in cash, we are well positioned to deliver on our 2000
18 plans.

19 For the quarter, trailing 12-month sales per customer who purchased during the
past 12 months was $121 , up from $107 for the first quarter of 1999. The
20 Company also reported that its overall fulfillment expenses were $99 million or
17 percent of sales this quarter.
21
22 52. The preceding statements were knowingly or deliberately recklessly false and misleading

23 for the reasons stated at paragraphs 34-38 and 42, and because : (a) defendant Jenson had no reasonable

24 or good faith basis to state that, "With the leading platform in online commerce, a global brand and
25 scale, and $1 billion in cash, we are well positioned to deliver on our 2000 plans"; and (b) defendants
in value of many of its internet stocks, recognition of future
27 CLASS ACTION COMPLAINT ZWERLING, SCRACHTER & ZWERLING, LLP
FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 14 Seattle, WA 98101
1 11 revenue was unlikely.

2 53. On May 15, 2000, the Individual Defendants caused the Company to file on Form 10-Q

3 I Amazon's quarterly report for the period ending March 31, 2000 (the "2000 First 10-Q"). Therein, in

4 1 addition to the statements made in the April 26, 2000 Press Release, the following statements were

5 I made.

6 The accompanying financial statements have been prepared by


Amazon.com, Inc,. ("Amazon.com" or the "Company") pursuant to the
7 rules and regulations of the Securities and Exchange Commission (the
"SEC") for interim financial reporting. These financial statements are
8 unaudited and, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments and accruals) necessary for
9 a fair presentation of the balance sheets, operating results, and cash flows
for the periods presented.
10

11 Unearned revenue is recognized over the period in which the service for
which consideration has been received is performed (generally one to 2.5
12 years). During the three months ended March 31, 2000, the Company
recorded $19.9 million of revenue from ACN partners.
13
54. The preceding statements were knowingly or deliberately recklessly false and misleading
14
for the reasons stated at paragraphs 34-38 and 42, and because the Company's financial statements were
15
not prepared in accordance with GAAP as revenues were being recognized when significant
16
contingencies existed as to their realization.
17
55. On July 26, 2000, "Amazon ... announced that net sales for the second quarter of 2000
18
were $578 million, an increase of 84% over net sales of $314 million for the second quarter of 1999."
19
The Press Release continued.
20

21
"We are pleased to report strong year-over-year growth in revenue, gross
22 margin and operating margin improvement, U.S. Books, Music and
DVD/Video segment pro forma operating profitability, and a cash
23 balance of $908 million," said Warren Jenson, Amazon.com chief
financial officer. "Looking ahead, we continue to expect "r forma
24 operating losses in the single digits as a percentage of sales by the fourth
quarter of this year and strong-over-year sales growth. In addition we
25 expect to end the year with roughly $1 billion in cash."

5{s: mere false and misleading for the reasons stated at paragraphs

27 CLASS ACTION COMPLAINT ZWERLING, SC14ACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 15 Seattle, WA 98101
34-38, 42, and, because given the precarious financial condition of the ACNs and the suspect revenues

2 of the agreements, defendant Jenson had no good faith or reasonable basis to state "Looking ahead, we

3 continue to expect p forma operating losses in the single digits as a percentage of sales by the fourth

4 quarter of this year and strong-over-year sales growth. In addition we expect to end the year with

roughly $ 1 billion in cash."

6 57. On August 2, 2000, the Individual Defendants caused Amazon to file with the SEC on
7 Form 10-Q its quarterly report for the period ending June 30, 2000 (the "2000 Second 10-Q").

8 58. Therein, the defendants made the same statements contained at paragraph 51 as stated

9 in the 2000 First 10-Q and the July 26, 2000 Press Release . Thus, the 2000 Second 10-Q was knowingly

10 or deliberately recklessly false and misleading for the reasons stated at paragraphs 52 and 56.

11 59. In addition, the following statements were made in the 2000 Second 10-Q.

12 During the three months and six months ended June 30, 2000, the
Company recorded $24.3 million and $44.2 million, respectively from
13 ACN partners . For the three months ended June 30, 2000, this revenue
was comprised of $4.2 million of cash, $ 19.2 million of equity securities
14 of public companies and $0. 9 million of equity securities of private
companies . For the six months ended June 30, 2000, this revenue was
15 comprised of $7.0 million of cash, $33.5 million of equity securities of
public companies and $3 .7 million of equity securities of private
16 companies.

17 The Company has recently entered into amendments and negotiations to


restructure its agreements with certain ACN partners and has accepted or
18 has been asked to accept lower future cash payments, revisions to the
related term of agreements, or both. The Company has adjusted the
19 amortization of previously unearned revenue to reflect these
modifications. As a result of, during the three months ended June 30,
20 2000, revenue recognized from certain ACN agreements was reduced by
a total of $2.9 million.
21
The Company accounts for several of its investments in ACN partners
22 using the equity method. During the three months and six months ended
June 30, 2000, the Company recorded $109.9 million and $197.8 million
23 of equity method losses for investments in ACN partners.

24 60. Although the Company for the first time reported the same losses recorded relating to the

25 ACN investments and the composition ofthe revenue received from the related ACN "agreements," the

were knowingly or deliberately recklessly false and misleading because: (a)


27 CLASS ACTION COMPLAINT ZWERLING, SCHACFITER & ZWERLING, LLP
FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 16 Seattle, WA 98101
Amazon recorded income related to the "agreements," in violation of GAAP, as the revenue was too

2 contingent to be recognized; and (b) defendants still failed to disclose the terms of the agreements, and
3 the agreements themselves as required by applicable SEC rules.
4 61. On October 24, 2000, the Individual Defendants caused Amazon to announce "net sales
5 Q for the third quarter of 2000 were $638 million, an increase of 79% over net sales of $356 store has
6 grown to become the second-largest U.S. store, behind Books and ahead of Music. Gross margin for

7 11 the third quarter of 2000 was 26%, up from 20% for the third quarter of 1999." The release continued:
8 "This was a strong quarter for Amazon.com; we are driving toward
profitability, and we surpassed our key internal operational and financial
9 objectives," said Warren Jenson, Amazon.com chief financial officer.
"As we enter our sixth holiday season, we are better prepared
10 operationally than ever operating margin for the fourth consecutive
quarter."
11l
62. The preceding statements were knowingly or deliberately recklessly false and misleading
12
for the reasons stated at paragraphs 34-38 and 42.
13
63. On October 30, 2000, the Individual Defendants caused Amazon to file with the SEC on
14
Form 10-Q its quarterly report for the period ending September 30, 2000 (the "3rd Qtr 10-Q"). The 3rd
15
Qtr 10-Q contained the same statements as in the October 24, 2000 Press Release, as well as the
16
statements contained in the 2nd Qtr 10-Q. Thus, the 3rd Qtr 10-Q was knowingly or recklessly false and
17
misleading for the reasons stated at paragraphs 60 and 62.
18
The Truth Is Revealed
19
64. In addition, the 3rd Qtr 10-Q reported the following:
20
The Company accounts for several of its investments in ACN partners
21 using the equity method During the three months and nine months ended
September 30, 2000, the Company recorded $69.1 million and $266.9
22 million of equity method losses for investments in ACN partners. During
the three months ended September 30, 2000, one of the Company's
23 equity method investees, living.com, Inc. (living.com) declared
bankruptcy.
24
25 We have significant indebtedness. As of September 30, 2000, we had
indebtedness under senior discount notes, convertible notes, capitalized
_other asset financingstotaling $2.1 billion.. _We

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 17 Seattle, WA 98101
may not be able to meet our debt service obligations.

65. On October 30, 2000, a Barron's article reported the following, which defendants knew

or were deliberately reckless in not knowing.


But after looking at filings, press releases and underwriter research from
the past nine months or so, we find it reasonable to conclude that Amazon
has misled investors through insufficient disclosure of material
information.

The prospectus for a February offering of convertible eurobonds


prominently promotes the financial benefits Amazon would receive from
its commerce-partner relationships with other online retailers. Nowhere,
though, does the company reveal or explain that most initial payments
would come in the form of stock, not cash. Yet an equity analyst of the
offering's lead underwriter, Morgan Stanley's Mary Meeker, published
a report several days before the debt offering stating that Amazon had
10 received multiyear "cash" commitments worth more than $450 million.
Did Amazon, with the witting or unwitting help if its underwriter,
11 mislead investors into thinking that many commerce-partner payments
were cash when they were not" (Company disclosure following the
12 offering has revealed that much of the payments is in stock.)

13 What's more, despite plunging prices of many commerce-partner shares


(one, Living.com, has filed for bankruptcy protection), Amazon continues
14 to report these revenues in press releases at levels well above their current
market values.
15
The prospect of fat commerce-partner revenues was presented to
16 European bond investors in releases and filings as evidence that Amazon
debt was a better investment than it ultimately was. The convertibles
17 were sold immediately after the company reported its fourth-quarter 1999
results, and they were essential for Amazon to maintain comfortable cash
18 balances through the winter and spring of this year. It was the third high-
yield debt offering for Amazon in as many years.
19
But in late January and early February, Amazon announced it had entered
20 into partnerships with four other internet companies: Audible,
Drugstore.com, Crreenlight.com and Living.com. Analysts cheered the
21 deals, which were supposed to pump as much as $130 million a year in
high-margin marketing fees into Amazon.
22
23
The one-two punch of commerce fees and supposedly rising wallet share
24 was all Wall Street needed to hear to get back on the Amazon
bandwagon, including Morgan Stanley's Meeker. In a February 3
25 research report entitled "Correction: Inflection ! Amazon.calm!" Meeker
sings the praises of Amazon's "very strong customer metrics" and very
_ strong_ top_1ine' that would soon be bolstered by commerce-partner

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue , Suite 1030
28 FEDERAL SECURITIES LAWS 18 Seattle , WA 98101
payments-

2 More important, Meeker reported that the payments would be made in the
form of cash. In a February note published five days before Morgan
Stanley lead-managed Amazon's convertible eurobond offering, Meeker
wrote: "These partnerships are now developing into a highmargin
4 revenue stream for Amazon. Combined, the multiyear cash commitments
to Amazon from its partners now total over $450 million."
5
What's more, as yet another example of Amazon's lack of clear
6 disclosure, documents filed by the company with the SEC related to the
bond offering fail to make plain that some of the payments would be
7 made in stock.

8 The following is an excerpt from an SEC filing by Amazon: "On January


31, 2000, we announced that we had agreed to acquire 5% of Audible
9 Inc., a leader in Internet-delivered spoken audio for PC based listening.
In connection with this investment, we also announced that we had
10 entered into an agreement to feature on the amazon.com site content and
services from Audible Inc. in exchange for payments of $30 million to us
11 over a three-year period."

12 That reads to us as though Amazon would get $30 million in cash from
Audible. But in fact, Amazon received $20 million in stock in front with
13 a pledge for the remaining $10 million in the third year of their
agreement. The reality is that the $20 million in Audible stock is now
14 worth about $1.3 million, and Audible's ability to pay the rest is in
question.
15
The result of all of this is that investors could have been led to believe
16 that Amazon would reap at least $450 million in high margin cash
revenues from its commerce partners as opposed to a fraction of that sum,
17 as represented by pounded-down shares. Amazon, in response to
telephone calls and an e-mail message, responded with an e-mailed copy
18 of a joint press release, which relates to one of their commerce partners
and is dated last December 1. It states: "In exchange for the investment
19 and the market relationship, Amazon.com will hold approximately 16.6%
of Ashford.com's outstanding common stock upon the closing of the
20 transaction." The company would not answer any questions or offer any
other examples.
21
Meeker's research note certainly didn't discourage European investors
22 from buying Amazon's convertibles. Nor did it hurt Amazon's stock on
the Nasdaq. The shares soared 21% to $84.19 on February 3, the first
23 trading day after Amazon announced its commerce-partner backlog.

24 Amazon could have set the record straight sooner and explained the
nature of the payments. If early payments were not intended to be made
25 mostly in cash, it could have easily released a statement clarifying or
correcting Meeker's information.

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 19 Seattle, WA 98101
1 Amazon seems to us to be reluctant to shed light on the severely impaired
value of its commerce-partner stock payments. The company still counts
2 about $30 million in stock paid by Drugstore.com in marketing fees as
income on its books. Those shares are now worth only about $3 million.
3 Similarly, the $50 million in Ashford stock it received is now worth
about $16 million.
4
Violations of GAAP and SEC Reports'g Rules
5
66. During the Class Period, defendants materially misled the investing public, thereby
6
inflating the price of the Company ' s securities, by publicly issuing false and misleading statements and
7
omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false
8
and misleading . Said statements and omissions were materially false and misleading in that they failed
9
to disclose material adverse information and misrepresented the truth about the Company, its financial
10
performance , accounting, reporting, and financial condition in violation of the federal securities laws
11^.
and GAAP.
12
67. GAAP consists of those principles recognized by the accounting profession as the
13
conventions, rules, and procedures necessary to define accepted accounting practice at the particular
14
time. Regulation S-X, to which The Company is subject as a registrant under the Exchange Act, 17
15
C.F.R. 210.4-01(a)(1), provides that financial statements filed with the SEC which are not prepared
16
in compliance with GAAP, are presumed to be misleading and inaccurate. SEC Rule 13a-13 requires
17
issuers to file quarterly reports.
18
68. SEC Rule 12b-20 requires that periodic reports contain such further information as is
19
necessary to make the required statements, in light of the circumstances under which they are made, not
20
misleading.
21
69. In addition, Item 303 of Regulation S-K requires that, for interim periods, the
22
Management Division and Analysis Section ("MD&A") must include, among other things, a discussion
23
of any material changes in the registrant's results of operations with respect to the most recent fiscal
24
year-to-date period for which an income statement is provided. Instructions to Item 303 require that this
25
discussion identify any significant elements of the registrant's income or loss from continuing operations

2711 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 11 FEDERAL SECURITIES LAWS 20 Seattle, WA 98101

3
that do not arise from or are not necessarily representative of the registrant's ongoing business. Item

2 303(a)(2)(ii) to Regulation S-K requires the following discussion in the MD&A of a company's publicly

3 filed reports with the SEC:


4 Describe any known trends or uncertainties that have had or that the
registrant reasonably expects will have a material favorable or
5 unfavorable impact on net sales or revenues or income from continuing
operations. If the registrant knows of events that will cause a material
6 change in the relationship between costs and revenues (such as known
future increases in costs of labor or materials or price increases or
7 inventory adjustments), the change in relationship shall be disclosed.

8 Paragraph 3 of the Instructions to Item 303 states in relevant part:

9 The discussion and analysis shall focus specifically on material events


and uncertainties known to management that would cause reported
10 financial information not to be necessarily indicative of future operating
results or of future financial condition. This would include descriptions
11 and amounts of (A) matters that would have an impact on future
operations and have not had an impact in the past ...
12

13 70. The Company's financial statements contained in the Prospectus, the 1999 10-K, and

14 quarterly reports filed with the SEC on Forms I0-Q for the quarterly periods throughout the Class Period
15 were presented in a manner that violated the principle of fair financial reporting and the following
16 GAAP, among others:
17 (a) The principle that financial reporting should provide information
that is useful to present and potential investors and creditors and
18 other users in making rational investment, credit and similar
decisions (FASB Statement of Concepts No. 1).
19

20 (b) The principle that financial reporting should provide information


about an enterprise's financial. performance during a period
21 (FASB Statement of Concepts No. 1).

22 (c) The principle that financial reporting should be reliable in that it


represents what it purports to represent (FASB Statement of
23 Concepts No. 2).

24 (d) The principle of completeness, which means that nothing material


is left out of the information that may be necessary to ensure that
25 it validly represents underlying events and conditions (FASB
Statement of Concepts No. 2).

27 CLASS ACTION COMPLAINT ZWERLING, sCHAC R & ZWERLING , LLP


28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 21 Seattle , WA 98101
1 (e) The principle that disclosure of accounting policies should
identify and describe the accounting principles followed by the
2 reporting entity and the methods of applying those principles that
materially affect the financial statements (APB Opinion No.. 22).
3
(f) The principle that management should provide commentary
4 relating to the effects of significant events upon the interim
financial results (APB Opinion No. 28).
5

6 71. In contravention of the provisions of GAAP and Regulations S-X, the Company's

7 1 financial statements falsely stated that they were in compliance with GAAP for the reasons alleged

8 1 herein . In addition, the Company's financial statements failed to comply with the provisions of AICPA

9 Statement Of Position 94-6, Disclosure Of Significant Risks and Uncertainties , which states that:

10 Financial statements should include a description of the major products


or services the reporting entity sells or provides and its principal markets,
11 including the locations of those markets. If the entity operates in more
than one business, the disclosure should also indicate the relative
12 importance of its operations in each business and the basis for the
determination for example assets, revenues, or earnings.
13

14 72. Such disclosure is intended to clarify the investment community's understanding of the
15 operations of the Company. As stated by the SEC in its Accounting Series Release 173: "it is important

16 that the overall impression created by the financial statements be consistent with the business realities
17 of the company's financial position and operations ...."
18 73. The financial statements of the Company disseminated to the investing public during the

19 Class Period were not presented in accordance with GAAP in that such financial statements failed to

20 disclose the facts that there existed a material overstatement of

21 a. the carrying value of investments and receivables as assets on the


Company's balance sheet; and
22
b. income, assets, and net worth due to the failure to properly
23 account for the recognition of revenue related to ACN
agreements.
24
74. In addition, during the Class Period, defendants violated SEC disclosure rules:
25
(a) by failing to disclose the existence ofknown trends, events or uncertainties j

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 22 Seattle, WA 98101

r
1 that they reasonably expected would have a material, unfavorable impact on net revenues or income or

2 that were reasonably likely to result in the Company's liquidity decreasing in a material way, in violation

3 of Item 303 of Regulation S-K under the Federal securities laws (17 C.F.R. 229.303), and that failure

4 to disclose the information rendered the statements that were made during the Class Period materially

5 false and misleading; and

6 (b) by failing to file financial statements with the SEC that conformed to the
7 I requirements of GAAP, such financial statements were presumptively misleading and inaccurate

8 pursuant to Regulation S-X, 17 C. F.R. 210. 4-01(a)(1).


9 75. Defendants were required to disclose, in the Company's financial statements, the
10 existence of the material facts described herein and to appropriately recognize and report assets,

11 revenues, and expenses in conformity with GAAP. The Company failed to make such disclosures and

12 to account for and to report its financial statements in conformity with GAAP. Defendants knew, or were

13 reckless in not knowing, the facts which indicated that the 1999 Form 10-K, the Prospectus , and all of

14 the Company's interim financial statements , press releases, public statements, and filings with the SEC,

15 which were disseminated to the investing public during the Class Period, were materially false and

16 misleading for the reasons set forth herein . Had the true financial position and results of operations of

17 the Company been disclosed during the Class period, the Company's common stock would have traded

18 at prices well below that which it did.

19 ADDITIONAL SCIENTER ALLEGATIONS

20 76. As alleged herein, defendants acted with scienter in that they knew or recklessly

21 disregarded that the public documents and statements issued or disseminated in the name of the

22 Company were materially false and misleading; knew or recklessly disregarded that such statements or

23 documents would be issued or disseminated to the investing public; and knowingly participated in the

24 issuance or dissemina tion of such statements or documents as primary violations of the Federal securities

25 laws.
__ Cry to fi le financiaLstatements duri ngthe Class Period that
-77t-
27 CLASS ACTION COMPLAINT ZWERLING , SCHACHTER & ZWERLING , LLP
28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 23 Seattle, WA 98101
were materially false and misleading, which defendants knew or recklessly disregarded were not in
2 conformity with GAAP.

3 78. As set forth herein, the Individual Defendants, by virtue of their receipt of information

4 reflecting the true facts regarding the Company and/or their control over the Company, which made them

5 privy to confidential proprietary information, participated in the fraudulent scheme alleged herein. With

6 respect to non-forward-looking statements and/or omissions, defendants knew and/or recklessly

7 disregarded the falsity and misleading nature of the information which they caused to be disseminated

8 to the investing public.

9 79. The Individual Defendants engaged in such a scheme and course of conduct to inflate the

10 price of the Company' s common stock in order to, among other things: (i) profit from the future increase

11 in the Company's common stock price to obtain both cash and stock incentive awards; (ii) to continue

12 its investment spree in ACNs, and; (iii) place debt such as the PEACS in the market at inflated prices.

13 Enhancement of Executive Compensation and Stock Ownership

14 80. The Individual Defendants had the motive to commit and participate in the wrongful
15 conduct complained of herein. In addition to the profits realized by defendant Bezos alleged above,

16 defendants were also motivated to inflate the value of their significant common stock ownership and

17 executive compensation, both of which were inextricably intertwined with increasing the value of

18 Amazon common stock.

19 81. The following statements were made in the 2000 Proxy Statement.

20 The Company offers compensation packages designed to attract and


retain outstanding employees and to encourage and reward the
21 achievement of corporate goals. Through broad-based employee
ownership ofthe Company's common stock, the Company seeks to align
22 employee financial interests with long-term stockholder value.

23 Executive officers receive total compensation packages in line with their


responsibilities and expertise. The company believes that the majority o
24 an executives's compensation should be closely tied to overall Company
performance. Accordingly, base salaries for executive officers in most
25 cases are relatively low, but are accompanied by significant stock option
grants and, in certain cases, cash bonuses.

27 CLASS ACTION COMPLAINT ZWERLJNG , SCHACHTER & ZWERLING , LLP


FOR VIOLATION OF 1904 Third Avenue, suite 1030
28 FEDERAL SECURITIES LAWS 24 Seattle, WA 98101
1 82. The Individual Defendants were highly motivated to inflate the value to the Company's

2 common stock because a substantial and material portion of their compensation and stock ownership

3 I# of Amazon was derived from the value of such stock.

4 11 Acquisitions and Nged for Continued Financing

5 83. During the Class Period, as alleged above, the Company made numerous investments

6 I in ACNs and acquired other companies . In order to finance these investments, it was necessary for

7 11 Defendants to maintain Amazon stock prices at artificially inflated levels.


8 84. In addition, as alleged herein, the Company issued the PEACs at inflated prices on

9 February 16, 2000, only days after touting the viability of the ACNs and falsely portraying them as cash

10 cows. Because the PEACs were convertible to common stock, it was essential for defendants to

11 maintain the price of its common stock at artificially inflated levels in order to sell the notes at the price

12 and amount offered.

13 85. The Individual Defendants had the opportunity to commit and participate in the wrongful

14 conduct complained of herein. Each is, or was, a senior executive officer and/or director of The

15 Company and, accordingly, controlled the information disseminated to the investing public in the

16 Company's press releases, SEC filings, and communications with analysts. Thus, each could falsify, and

17 did falsify, the information that reached the public about The Company's business and financial results.

18 COUNTI
(AGAINST ALL DEFENDANTS FOR VIOLATIONS OF
19 SECTION 10(b) OF THE EXCHANGE ACT AND
RULE 10b-5 PR MULGATED THEREUNDER)
20
86. Plaintiff repeats and re-alleges the allegations contained above, as if fully set forth herein.
21
87. This Count is asserted against all defendants and is based upon Section 10(b) of the
22
Exchange Act, 15 U. S.C. 78j (b), and Rule 10b-5 promulgated thereunder.
23
88. During the Class Period, defendants, singly and in concert, engaged in a common plan,
24
scheme, and unlawful course of conduct, pursuant to which they knowingly or recklessly engaged in
25
acts, transactions, practices, and courses of business which operated as a fraud and deceit upon plaintiff

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, Lt.'


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 25 Seattle, WA 98101
and the other members of the Class, and made various deceptive and untrue statements of material facts

2 and omitted to state material in order to make the statements made, in light of the circumstances under

which they were made, not misleading to plaintiff and the other members of the Class. The purpose and

4 effect of said scheme, plan, and unlawful course of conduct was, among other things, to induce plaintiff

and the other members of the Class to purchase the Company's common stock during the Class Period

6 at artificially inflated prices and to consummate placement of the PEACS.

7 89. During the Class Period, defendants, pursuant to said scheme, plan, and unlawful course
8 of conduct, knowingly and recklessly issued, cause to be issued, participated in the issuance of, the
9 preparation and issuance of deceptive and materially false and misleading statements to the investing

10 public as particularized above.


11 90. As a result ofthe dissemination of the false and misleading statements set forth above,

12 the market price of the Company's common stock was artificially inflated during the Class Period. In

13 ignorance of the false and misleading nature of the statements described above and the deceptive and

14 manipulative devices and contrivances employed by said defendants, plaintiff and the other members

15 of the Class relied, to their detriment, on the integrity of the market price of the stock in purchasing the

16 Company's common stock. Had plaintiff and the other members of the Class known the truth, they

17 would not have purchased said shares or would not have purchased them at the inflated prices that were

18 paid.

19 91. Plaintiff and the other members of the Class have suffered substantial damages as a result

20 of the wrongs herein alleged in an amount to be proved at trial.


21 92. By reason of the foregoing, defendants directly violated Section 10(b) of the Exchange

22 Act and Rule l Ob-5 promulgated thereunder in that they: (a) employed devices, schemes, and artifices

23 to defraud; (b) made untrue statements of material facts or omitted to state material facts in order to

24 make the statements made, in light of the circumstances under which they were made, not misleading;

25 or (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon

iii connection with their purchases or acquisition of the

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 26 Seattle, WA 98101
1 11 Company's common stock during the Class Period.

2 COUNT H
3 (AGAINST TIE INDIVIDUAL DEFENDANTS
FOR VIOLATION OF SECTION 20(a) OF
4 THE EXCHANGE ACT)

5 93. Plaintiff repeats and realleges the allegations contained above, as if set forth fully herein.

6 94. The Individual Defendants, by virtue of their position, stock ownership and/or specific

7 acts described above, were, at the time of the wrongs alleged herein, controlling persons within the

8 meaning of Section 20(a) of the Exchange Act.

9 95. The Individual Defendants had the power and influence and exercised the same to cause

10 the Company to engage in the illegal conduct and practices complained of herein.

11 96. By reason ofthe conduct alleged in Count I of the Complaint, the Individual Defendants

12 are liable for the aforesaid wrongful conduct, and are liable to plaintiff and to the other members of the
13 Class for the substantial damages which they suffered in connection with their purchase or acquisition

14 of the Company's common stock during the Class Period.

15 JURY DEMAND

16 97. Plaintiff demands a trial by jury on all issues.

17 PRAYER FOR RELIEF

18 WHEREFORE, plaintiff, on her own behalf and on behalf of the Class, prays for
19 judgment as follows:
20 A. Declaring this action to be a proper class action and certifying plaintiff as class

21 representatives under Rule 23 of the Federal Rules of Civil Procedure;

22 B. Awarding compensatory damages in favor of plaintiff and the other members of


23 the Class against all defendants, jointly and severally, for the damages sustained as a result of the
24 wrongdoings of defendants, together with interest thereon;
25 C. Awarding plaintiff the fees and expenses incurred in this action, including

wance of fees for plaintiffattorneys and experts;

27 CLASS ACTION COMPLAINT ZWERLING, SCHACHTER & ZWERLING, w'


28 FOR VIOLATION OF 1904 Third Avenue, Suite 1030
FEDERAL SECURITIES LAWS 27 Seattle , WA 98101
1 D. Granting extraordinary equitable and/or injunctive relief as permitted by law,

2 equity and federal and state statutory provisions sued on hereunder, including attaching, impounding,

3 imposing a constructive trust upon or otherwise restricting the proceeds of defendants' trading activities

4 or their other assets so as to assure that plaintiff have an effective remedy; and

5 E. Granting such other and further relief as the Court may deem just and proper.
6 1 Dated: March 9, 2001

7 ZWERLING, SCHACHTER & ZWERLING, LLP


8

9
y:
10 D r SBA 2 728}
4 Third Avenue, Suite 1030
11 Seattle , Washington 98101
Tel: (206) 223-2053
12 Fax: (206) 343-9636
13 WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
14 Robert I. Harwood
Frederick W. Gerkens III
15 Thomas J. Harrison, III
488 Madison Avenue
16 New York, New York 10022
Tel: (212) 935-7400
17 Fax: (212) 753-3630

18 ZWERLING SCHACHTER & ZWERLING, LLP


Jeffrey C . Zwerling
19 Richard A. Speirs
767 Third Avenue
20 New York, NY 10017
Tel: (212) 223-3900
21 Fax: (212) 371-5969

22 FARUQI & FARUQI, LLP


Nadeem Faruqi
23 320 East 39th Street
New York, New York 10016
24 Tel: (212) 983-9330
Fax: (212) 983-9331
25
Attorneys for Plaintiff

27 CLASS ACTION COMPLAINT ZWERLING , SCHACHTER & ZWERLING , LLP


FOR VIOLATION OF 1904 Third Avenue, Suite 1030
28 FEDERAL SECURITIES LAWS 28 Seattle, WA 98101