1 Amended Consolidated Class Action Complaint 01/09/2015

Case 3:14-cv-01982-PGS-DEA Document 44 Filed 01/09/15 Page 1 of 72 PageID: 540

COHN LIFLAND PEARLMAN HERRMANN & KNOPF LLP

PETER S. PEARLMAN JEFFREY W. HERRMANN Park 80 West - Plaza One 250 Pehle Avenue, Suite 401 Saddle Brook, NJ 07663 Telephone: 201/845-9600 201/845-9423 (fax)

Liaison Counsel

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

In re INTERCLOUD SYSTEMS, INC. SECURITIES LITIGATION

This Document Relates To:

No. 3:14-cv-02072-PGS-TJB

Master Docket No. 3:14-01982-PGS-DEA

CLASS ACTION

AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

) JURY TRIAL DEMAND

)


TABLE OF CONTENTS

Page

I. SUMMARY OF THE ACTION...................................................................... 1

II. JURISDICTION AND VENUE ...................................................................... 6

III. PARTIES ......................................................................................................... 7

A. Plaintiff .................................................................................................. 7

B. Defendants ............................................................................................. 7

IV. SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS ......................... 13

A. Background of the Company ............................................................... 13

B. The Undisclosed Paid Promotional Scheme ....................................... 14

1. “5 Reasons To Buy InterCloud Systems Right Now,” Published on December 3, 2013 ............................................... 15

2. “Watch How InterCloud Grows Under The Guidance Of Mark Munro,” Published on December 17, 2013 ..................... 20

3. “InterCloud Systems: A Cloud Integrator With Strong Growth Potential,” Published on January 13, 2014 .................. 24

C. The Truth About Defendants’ Paid Promotional Scheme Is Revealed.............................................................................................. 29

D. The Undisclosed Paid Promotions Violated Section 17(b) of the Securities Act of 1933 ......................................................................... 38

E. Defendants Knew of, or Recklessly Disregarded that, the Paid Articles Were False and Misleading and Did Not Contain Appropriate Disclosures ...................................................................... 40

V . LOSS CAUSATION ..................................................................................... 42

A. March 13, 2014 Disclosure ................................................................. 44

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Page

B. March 17, 2014 Disclosure ................................................................. 46

C. March 20, 2014 Disclosure ................................................................. 47

D. March 27, 2014 Disclosure ................................................................. 49

VI. PRESUMPTION OF RELIANCE ................................................................ 53

VII. NO SAFE HARBOR ..................................................................................... 56

VIII. PLAINTIFF’S CLASS ACTION ALLEGATIONS ..................................... 57

COUNT I For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants ........................................ 60

COUNT II For Violations of Section 20(a) of the Exchange Act Against Defendants Munro and Petraglia ................................................................... 65

PRAYER FOR RELIEF .......................................................................................... 66

JURY DEMAND ..................................................................................................... 67

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By and through its undersigned counsel, Lead Plaintiff Charles R. Gilbert, Jr.

(“Plaintiff”), residing at 301 Bristol Downs Drive, Gaithersburg, Maryland 20877-

4304, alleges the following against Defendants InterCloud Systems, Inc.

(“InterCloud” or the “Company”), Mark E. Munro (“Munro”), Thomas Meyer

(“Meyer), John Mylant (“Mylant”), CSIR Group, LLC (“CSIR”), and Christine

Petraglia (“Petraglia”) (collectively, “Defendants”), upon personal knowledge as to

those allegations concerning Plaintiff and, as to all other matters, upon the

investigation of counsel, which included, without limitation: (a) review and analysis

of public filings made by InterCloud and other related parties and non-parties with the

U.S. Securities and Exchange Commission (“SEC”); (b) review and analysis of press

releases and other publications disseminated by certain of the Defendants and other

related non-parties; (c) review of news articles and shareholder communications; (d)

review of other publicly available information concerning Defendants and related non-

parties; (e) consultation with experts; and (f) interviews with factual sources,

including industry participants.

I. SUMMARY OF THE ACTION

1. This is a federal securities class action against Defendants for violations

of the federal securities laws. Plaintiff brings this action under Sections 10(b) and

20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of

himself and all persons or entities who purchased or acquired shares of InterCloud

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(the “Class”) between December 3, 2013 and March 27, 2014, inclusive (the “Class

Period”). Plaintiff alleges that, during the Class Period, Defendants engaged in a

fraudulent scheme to artificially inflate the Company’s stock price by disseminating

false and misleading analyst reports into the market concerning the Company’s

growth prospects, which were actually paid for by the Company, and first approved by

InterCloud’s management, without investors’ knowledge. As a result of this fraud, as

more fully described below, shareholders suffered millions of dollars in losses.

2. InterCloud describes itself as a global single-source provider of value-

added services for both corporate enterprises and service providers offering cloud and

managed services, professional consulting services, and voice, data, and optical

solutions to assist its customers in meeting their changing technology demands. The

Company’s stock is listed on the NASDAQ Stock Market (“NASDAQ”) under the

ticker symbol “ICLD.”

3. The Company having just moved from over-the-counter trading to the

NASDAQ on October 31, 2013, Defendants set out to drive up InterCloud’s share

price through an aggressive promotional campaign. Using CSIR as a paid

intermediary, InterCloud commissioned numerous bullish articles enthusiastically

touting InterCloud stock based on the Company’s climbing revenues and “strong

growth potential” under Defendant Munro’s leadership. InterCloud’s paid shills

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promoted “5 Reasons To Buy InterCloud Systems Right Now,” and told investors to

“Watch How InterCloud Grows Under The Guidance Of Mark Munro.”

4. Through this practice, Defendants were able to manipulate the market to

create the perception of widespread excitement for significant growth at InterCloud.

Throughout the Class Period, Defendants made numerous false and misleading

statements in the form of purportedly independent analyst research reports posted on

investor websites such as seekingalpha.com and wallstcheatsheet.com . At least three

such articles were published by three different authors during the Class Period.

Defendants’ promotional campaign was incredibly successful; InterCloud’s share

price soared to over $19 per share in late December 2013, more than quadruple its

NASDAQ opening price of $4.00 on October 31, 2013.

5. However, Defendants failed to disclose that: (1) these bullish articles

touting InterCloud stock were actually commissioned by the Company using its paid

promoter, CSIR; (2) CSIR had actively recruited freelance writers to pen these

positive articles on InterCloud to be disguised as independent research; (3)

InterCloud’s management, including Defendant Munro, reviewed and approved the

articles prior to their publication; and (4) the freelance writers were paid hundreds of

dollars per article by CSIR and InterCloud to hype the Company’s stock. As a result

of the foregoing omissions, Defendants’ pro-InterCloud articles published during the

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Class Period were materially false and misleading and therefore violative of the

federal securities laws.

6. The truth about Defendants’ fraudulent, manipulative promotional

scheme was later revealed through a series of partial revelations in March 2014. The

first such disclosure occurred on March 13, 2014 when an analyst by the name of

Richard Pearson first exposed the paid promotions in a report entitled, “Behind The

Scenes With Dream Team, CytRx And Galena” posted on seekingalpha.com .

Pearson’s exposé revealed that stock promoter the DreamTeamGroup (“DreamTeam”)

had attempted to hire him to write paid promotional articles on certain companies

without disclosing such payment.

7. Pearson’s report provided detailed evidentiary support, including email

exchanges, indicating that management of the two target companies were intimately

involved in reviewing and editing the paid articles on their own stock, and were well

aware that the articles failed to disclose this paid marketing relationship. Pearson

revealed that DreamTeam’s promotional campaigns used multiple aliases on third-

party investor websites like seekingalpha.com , sometimes even pretending to be hedge

fund managers touting the stock. Significant to Defendants’ fraud, some of the aliases

revealed by Pearson to be DreamTeam’s paid shills were the same people who had

promoted InterCloud stock during the Class Period on the same investor websites.

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8. As a result of this revelation that the same individuals pumping

InterCloud stock during the Class Period had been implicated in a fraudulent

promotional scheme concerning other stocks, InterCloud’s share price sunk 9%, from

a close of $13.10 on March 12, 2014 to a close of $11.91 on March 13, 2014, on

abnormally heavy trading volume nearly five times greater than the previous ten

days’ average.

9. Then, only days later, after trading hours on March 17, 2014, journalist

Roddy Boyd published his own report highly critical of InterCloud. Entitled “The

Copper Archipelago: InterCloud,” this exposé further laid bare that overly positive

articles bullish on InterCloud during the Class Period were actually paid promotions

emanating directly from Defendants. On this news, shares of InterCloud declined

$1.28 per share, or nearly 11%, to close at $10.59 per share on March 18, 2014 on

unusually heavy volume, resulting in millions in investor losses.

10. Next, the Rosen Law Firm announced on March 21, 2014 that it was

investigating potential securities fraud claims against InterCloud stemming from its

paid promotional scheme. This news that Defendants’ fraud may result in significant

financial exposure and/or SEC scrutiny sent investors scrambling, causing InterCloud

shares to plummet nearly 29% from a close of $10.33 on March 20, 2014 to $7.35 on

March 21, 2014, resulting in millions more in investor losses. Trading volume on

March 21, 2014 was nearly ten times greater than the previous day’s volume.

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11. Further, on March 27, 2014, Richard Pearson published a follow-up

report to his original March 13th exposé. This follow-up newly disclosed that a

representative from CSIR had contacted him directly to author flattering articles on

InterCloud for a flat fee. And, prior to publishing, Pearson’s articles would first be

reviewed by InterCloud management, including Defendant Munro. On this news

directly linking, for the first time, InterCloud’s management with the paid promotional

activities, the Company’s share price tumbled more than 10% on heavy trading

volume, to a close of $6.60 on March 27, 2014 from a close of $7.38 the day before.

12. As a result of Defendants’ wrongful Class Period acts and omissions, and

the precipitous decline in the market value of the Company’s securities following

these revelations of the truth, Plaintiff and other Class members have suffered

significant losses and damages.

II. JURISDICTION AND VENUE

13. The claims asserted herein arise under and pursuant to Sections 10(b) and

20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5

promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5(a), (b), and/or (c). This

Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

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

14. Venue is proper in this District pursuant to Section 27 of the Exchange

Act (15 U.S.C. §78aa), and 28 U.S.C. §1391(b). Many of the false and misleading

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statements and omissions were made in or issued from this District. InterCloud’s

principal executive offices are located at 1030 Broad Street, Shrewsbury, New Jersey

07702, and many of the acts and transactions giving rise to the violations of law

complained of occurred in this District.

15. In connection with the challenged conduct, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but

not limited to, the United States mails, interstate telephone communications, and the

facilities of the national securities markets.

III. PARTIES

A. Plaintiff

16. Plaintiff was appointed to serve as Lead Plaintiff in this action by Order

of this Court dated November 5, 2014 [Dkt. No. 36]. The appointment was affirmed

by Order dated December 15, 2014 [Dkt. No. 43]. As shown in the certification filed

with the Court on May 27, 2014 [Dkt. No. 12-4] and incorporated herein, Plaintiff

purchased InterCloud common stock at artificially inflated prices during the Class

Period and suffered an economic loss when true facts about the Company’s fraudulent

practices were disclosed, and the stock price resultantly declined.

B. Defendants

17. Defendant InterCloud is a Delaware corporation with principal executive

offices located in Shrewsbury, New Jersey. InterCloud bills itself as a global single-

source provider of value-added services for both corporate enterprises and service

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providers offering cloud and managed services, professional consulting services and

voice, data, and optical solutions to assist its customers in meeting their changing

technology demands.

18. Defendant Munro is, and at all relevant times was, InterCloud’s Chief

Executive Officer (“CEO”) and Chairman of the Board. He reviewed and approved

the bullish articles on InterCloud stock commissioned by CSIR during the Class

Period at InterCloud’s behest.

19. Defendant Meyer is a freelance writer who, during the Class Period,

acted as a paid promoter for InterCloud working closely with Defendant CSIR to

prepare and publish promotional articles enthusiastically touting InterCloud stock,

with approval from InterCloud’s management, including Defendant Munro, without

disclosing his receipt of payment for the articles.

20. Defendant Mylant is a freelance writer who, during the Class Period,

acted as a paid promoter for InterCloud working closely with Defendant CSIR to

prepare and publish promotional articles enthusiastically touting InterCloud stock,

with approval from InterCloud’s management, including Defendant Munro, without

disclosing his receipt of payment for the articles.

21. Defendant CSIR is a Manhattan-based investor relations firm hired by

InterCloud. During the Class Period, CSIR worked in concert with Defendants

InterCloud and Munro to hire freelance writers such as Defendants Meyer and Mylant

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to prepare and publish promotional articles enthusiastically touting InterCloud stock,

which were first reviewed and approved by InterCloud management, including

Defendant Munro, with CSIR serving as intermediary between the writers and

InterCloud.

22. Defendant Petraglia is, and at all relevant times was, the founder and

principal of CSIR. According to CSIR literature, Defendant Petraglia boasts 18 years

of financial services experience in client relations, sales, marketing, and investor

relations. During the Class Period, she worked in concert with Defendants InterCloud

and Munro and facilitated CSIR’s hiring of freelance writers such as Defendants

Meyer and Mylant to prepare and publish promotional articles enthusiastically touting

InterCloud stock, which were first reviewed and approved by InterCloud management,

including Defendant Munro, but failed to disclose such review or the writers’ payment

for their articles.

23. Defendant Munro is liable as a direct participant in the wrongs

complained of herein. In addition, Defendant Munro, by reason of his status as a

senior executive officer, was a “controlling person” within the meaning of Section

20(a) of the Exchange Act and had the power and influence to cause InterCloud to

engage in the unlawful conduct complained of herein. Because of his position of

control, Defendant Munro was able to, and did, directly or indirectly, control the

conduct of InterCloud’s business.

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24. Defendant Petraglia is liable as a direct participant in the wrongs

complained of herein. In addition, Defendant Petraglia, by reason of her status as a

senior executive officer, was a “controlling person” within the meaning of Section

20(a) of the Exchange Act and had the power and influence to cause CSIR to engage

in the unlawful conduct complained of herein. Because of her position of control,

Defendant Petraglia was able to, and did, directly or indirectly, control the conduct of

CSIR’s business.

25. Defendants, individually and collectively, participated in the drafting,

preparation, and/or approval of the various articles, reports and other communications

complained of herein and were aware of, or recklessly disregarded, the misstatements

contained therein and omissions therefrom, and were aware of their materially false

and misleading nature.

26. Defendants Munro and Petraglia, both individually and collectively,

because of their positions of control and authority as officers of their respective

companies, were able to, and did, control the content of the various articles, reports

and other communications complained of herein. Each Defendant was provided with

copies of the documents alleged herein to be misleading prior to or shortly after their

issuance and/or had the ability and/or opportunity to prevent their issuance or cause

them to be corrected. Accordingly, Defendants are responsible for the accuracy of the

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public reports and releases detailed herein and are therefore primarily liable for the

representations contained therein.

27. Each of the above officers of InterCloud and CSIR, by virtue of his or her

high-level position with his or her company, directly participated in the management

of that company, was directly involved in the day-to-day operations of that company

at the highest levels, and was privy to confidential proprietary information concerning

the Company and its business, operations, and financial condition, as alleged herein.

These Defendants were involved in drafting, producing, reviewing, and/or

disseminating the false and misleading statements and information alleged herein,

were aware, or recklessly disregarded, that these false and misleading statements were

being issued regarding the Company and omitted material adverse facts regarding the

Company, and approved or ratified these statements and failed to disclose these facts,

in violation of the federal securities laws.

28. Since InterCloud was a publicly-traded company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is,

traded on the NASDAQ and governed by the federal securities laws, Defendants had a

duty to promptly disseminate accurate and truthful information with respect to

InterCloud’s financial condition and performance, growth, operations, financial

statements, business, products, markets, management, earnings, and present and future

business prospects, and to correct any previously issued statements that had become

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materially misleading or untrue so that the market price of InterCloud’s securities

would be based upon truthful and accurate information. Defendants’

misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

29. Defendants are liable as participants in a fraudulent scheme and course of

conduct that operated as a fraud or deceit on purchasers of InterCloud’s publicly

traded securities by disseminating materially false and misleading statements and/or

concealing material adverse facts. The scheme deceived the investing public

regarding the Company’s business prospects and the intrinsic value of InterCloud

common stock, causing Plaintiff and other members of the Class to purchase

InterCloud common stock at artificially inflated prices.

30. Defendants are liable for: (i) making false and misleading statements;

and/or (ii) failing to disclose adverse facts known to them about InterCloud.

Defendants’ fraudulent scheme and course of business that operated as a fraud or

deceit on purchasers of InterCloud common stock was a success, as it: (i) deceived the

investing public regarding the Company’s business prospects; (ii) artificially inflated

the price of InterCloud common stock; and (iii) caused Plaintiff and other members of

the Class to purchase InterCloud common stock at artificially inflated prices.

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IV. SUBSTANTIVE ALLEGATIONS AND DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS

A. Background of the Company

31. InterCloud bills itself as a single-source provider of end-to-end

information technology (“IT”) and next-generation network solutions to the

telecommunications service provider and corporate enterprise markets through cloud

platforms and professional services. The Company offers cloud and managed

services, professional consulting and staffing services, and voice, data and optical

solutions to assist its customers in meeting their changing technology demands.

InterCloud’s engineering, design, installation, and maintenance services support the

build-out and operation of some of the most advanced enterprise, fiber optics,

ethernet, and wireless networks.

32. Though the Company was incorporated in 1999, it functioned as a

development stage company with limited activities for the next 10 years. Then, in

January 2010, InterCloud acquired Digital Comm., Inc., which specialized in specialty

contracting services primarily in the installation of fiber optic telephone cable.

InterCloud’s operations thus picked up, and through September 2012, substantially all

of the Company’s revenues derived from such specialty contracting services. As a

result of subsequent acquisitions, InterCloud has since diversified its revenue sources

to include telecommunications staffing services and additional specialty contracting

services.

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B. The Undisclosed Paid Promotional Scheme

33. The Company’s stock traded over-the-counter on the OTCQB

Marketplace until its initial public offering on the NASDAQ on October 31, 2013.

With newfound exposure moving from the pink sheets to the NASDAQ, and coming

off its most successful quarter to date, Defendants immediately sought to make

InterCloud a more recognizable name among investors.

34. Beginning no later than December 2013, at InterCloud’s direction,

Defendant CSIR undertook a campaign to publicly tout the Company’s stock to

artificially inflate InterCloud’s share price. This promotional campaign, which

included numerous published articles (the “Articles”) on third-party investor websites

like seekingalpha.com and wallstcheatsheet.com , 1 was indeed successful.

InterCloud’s stock price soared to a high of $19.39 on December 31, 2013 just weeks

after opening on the NASDAQ at approximately $4 per share. The Articles

commissioned by Defendants caused the price of the Company’s stock to more than

quadruple during the Class Period.

1 When Defendants’ fraudulent promotional scheme was ultimately revealed beginning in March 2014, as discussed infra, these third-party websites summarily removed the Articles in question for violating the websites’ terms of use by not disclosing the authors’ paid relationships with the subjects of their Articles. While Plaintiffs were able to obtain copies of certain of these Articles (redacted) from outside sources, they believe still more were published during the Class Period (but subsequently taken down by the host websites). Armed with the privileges of a formal discovery process, Plaintiffs are confident they will uncover all pro-InterCloud Articles published during the Class Period.

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35. Defendants’ illicit promotional campaign was designed to increase

shareholder value and raise visibility for the Company, which it succeeded in doing.

However, the Articles failed to disclose that they were penned by paid promoters

under Defendants’ direction with Defendants’ approval, or that any financial

relationship existed between the Articles’ authors and the Company.

1. “5 Reasons To Buy InterCloud Systems Right Now,” Published on December 3, 2013

36. The Class Period begins on December 3, 2013 when an Article entitled

“5 Reasons To Buy InterCloud Systems Right Now,” authored by Defendant Meyer

under the pseudonym “Equity Options Guru,” 2 was posted on seekingalpha.com . This

Article boasted of the Company’s growth, noting InterCloud’s recent announcement

of “record third quarter earnings” and promising that “[a] look at the revenue growth

pattern over the past 3 years should really make investors smile.” “The quick and

steady growth of InterCloud Systems has been as strong as any company.”

37. Defendant Meyer’s Article praised InterCloud’s recent acquisitions,

which “should pave the way for one of InterCloud System’s main goals which is to

2 Two Class Period Articles on InterCloud posted on seekingalpha.com were penned by “Kingmaker” and “Equity Options Guru.” As discussed infra , Defendant Meyer published articles under each of these pseudonyms to create the false impression that multiple analysts were excited about the stock of whichever company he was then promoting. See ¶¶75-76.

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expand internationally.” Further, “successful international expansion could help

InterCloud Systems generate revenue in the hundreds of millions.”

38. Among the noted advantages of InterCloud’s cloud services, this Article

highlighted that the Company’s InterCloudVm cloud services platform “will offer

several competitive advantages which should help to further drive revenue growth in

the future.” Those competitive advantages included cost savings, increased speed,

improved information security, and decreased deployment time.

39. Defendant Meyer’s Article also highlighted InterCloud’s “soaring share

price” and listed the advantages of ICLD stock having recently moved from the

OTCQB to the NASDAQ exchange: (i) greater liquidity for investors; (ii) better

execution fills for investors; and (iii) allowing institutional investors to enter the

market for ICLD shares. Meyer added, “Now that InterCloud Systems has reached a

more appropriate valuation of roughly $50 million, investors need to determine

whether it is undervalued at today’s price. I believe that it is.”

40. Comparing revenue growth rates for the first three quarters of 2013 and

estimating revenues for the fourth quarter, Defendant Meyer’s Article went on to state

that InterCloud “is currently valued at less ($50 million) than what it is expected to

generate in total sales ($61.2 million). At the very least, InterCloud Systems should

be trading at 2x price/sales ratio. That would value the company at $122.4 million

and indicate a trading price of $19 per share ($122.4 million valuation/shares

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outstanding of 6.41 million).” The Article continued, “If InterCloud Systems can

produce a strong 4th quarter number, I expect that shares will begin trading closer to

the company’s true valuation.”

41. The Article then concluded, “InterCloud Systems appears to be making

all the right moves. The company has been able to generate consistent and solid

revenue growth while turning in its largest net income during the most recent quarter.

By combining an effective corporate growth plan with a state of the art technology

platform, it appears that InterCloud Systems shares may be headed much higher over

the next several months.”

42. As a result of this bullish Article, InterCloud stock rallied strongly on

December 3, 2013, from an opening share price of $7.63 to a closing price of $10.40,

representing a gain of over 36% .

43. However, Defendant Meyer’s Article failed to disclose that he was being

paid by CSIR and InterCloud to offer his enthusiastic opinions about the Company’s

stock. Defendant Meyer similarly failed to disclose that InterCloud management,

including Defendant Munro, was given the opportunity to review, edit, and approve

his Article before it was submitted for publication on seekingalpha.com . In short,

Defendant Meyer failed to disclose that his purportedly independent research on

InterCloud was, in actuality, a paid advertisement for the Company. See infra ¶¶74-

91.

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44. Defendant Meyer’s failure to make these disclosures violated the Terms

of Use of seekingalpha.com . Indeed, seekingalpha.com demands that all “User

Submissions” (such as the above Article posted by Defendant Meyer) abide by the

following disclosure rules:

• You may not write about a stock with the intention to boost or reduce the stock’s price and sell (or buy) the stock into the resulting strength or weakness.

• Abide by the following conflict of interest rule: You will disclose any material relationships with companies whose stocks you write about in a User Submission or parties that stand to gain in any way from the viewpoint you are outlining. Examples: You must disclose if you are employed by a company whose stock you are writing about; perform consulting for a company you write about; receive paid advertising revenue or any other form of sponsorship fee from a company you write about. This applies to narrow asset classes as well. For example, if you are paid to promote a gold dealer, that must be disclosed in any User Submission about gold.

• If you choose an alias, be responsible for all statements made and acts or omissions that occur by use of your alias.

45. Further, under seekingalpha.com ’s Terms of Use, users like Defendant

Meyer may not :

• Post or transmit any Content that you either know or should know is false, deceptive or misleading, or misrepresent or deceive others as to the source, accuracy, integrity or completeness of any comment you post.

• By use of your alias or in any comment, impersonate any person or entity, falsely or deceptively state, infer or otherwise misrepresent your affiliation with or connection to any person or entity .

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• Post or transmit any advertising, promotional materials , so called “chain letters,” “pyramid” or other schemes or invitations to participate in these or any other form of solicitation or promotion.

• Violate any local, state, national or international law, regulation or order of any court, including but not limited to regulations of the U.S. Securities and Exchange Commission , any rules of any securities exchange, including without limitation, the New York Stock Exchange, the American Stock Exchange or The Nasdaq Stock Market.

46. Defendants owed a duty to InterCloud investors to disclose that

Defendant Meyer’s Article was actually a paid promotion for InterCloud, written at

the Company’s behest and paid for by CSIR and InterCloud. Defendants also owed a

duty to investors to disclose that Defendant Meyer’s purportedly independent analysis

was actually reviewed, edited, and approved by CSIR and InterCloud management,

including Defendant Munro.

47. Defendant Meyer’s December 3, 2013 Article, which was also reviewed

and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was thus false and

misleading for omitting the above disclosures. Additionally and independently,

Defendants acted in concert to perpetuate a fraudulent scheme to violate a standard set

by Section 17(b) of the Securities Act of 1933 (“Securities Act”), see infra ¶¶92-96,

promote the Company’s stock under the guise of independent research and analysis,

and thus manipulate the market for InterCloud stock to Plaintiff’s and the Class’s

detriment.

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2. “Watch How InterCloud Grows Under The Guidance Of Mark Munro,” Published on December 17, 2013

48. Two weeks later, on December 17, 2013, another Article was posted on

seekingalpha.com entitled “Watch How InterCloud Grows Under The Guidance Of

Mark Munro.” This Article, written by Defendant Mylant, touted Munro’s talents and

expressed great confidence in InterCloud with Defendant Munro at the helm. “Mark

Munro has been in the IT and telecom industry since 1985 and has been building and

investing in the IT, telecom and cloud venues since 1990. When he took over the

company in 2012[,] he saw that the opportunity for growth was in the cloud. Under

his guidance, I see great opportunity for growth out of InterCloud (ICLD).”

49. In reference to a recently announced acquisition by InterCloud,

Defendant Mylant asserted it “just goes to prove how Mr. Munro will be able to guide

this company and continue to help it prosper.” This was “a significant acquisition for

the company that was made possible by the sale of $11.625 million aggregate

principal amount of 12% convertible debentures. Under the guidance of Mr. Munro,

the company continues to grow and bring value to shareholders.”

50. Defendant Mylant’s Article continued, “The Cloud, according to

management, should be the company’s greatest percent of growth in the future. The

company does not resell other company’s cloud platforms, it has its own. While many

cloud providers tend to look like ‘rebranded data storage companies,’ InterCloud is

transitioning into a ‘cloud integration company’ that will custom design and manage

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private cloud networks, manage large telecom networks as well as service legacy IT

networks for enterprise clients. The company does cable installation for its WiFi and

DAS customers, but it is not the bread-and-butter of its revenue base. It will be

leveraging the relationships it has with service providers and large enterprises in

network management with the intent to transfer people to its own cloud platform.”

51. “Under Mark Munro’s guidance, the company has started to see the

growth it anticipates. The news that revenue increased to $43 million for the first nine

months of 2013 and announcing net income of $1.3M in Q03 sent the stock soaring.

If the company continues to perform like it has under Mr. Munro, I believe that it’s

possible to surpass the $60 million in revenue by year end. The company’s larger

clients tend to spend more of their money in the latter half of the year and a larger

piece of the company’s revenue has traditionally come in the fourth quarter.”

52. Defendant Mylant’s Article further highlighted, “The company will

continue to grow in the cloud space. Even though it is growing at 20% organically in

the first 9 months of 2013, the company expects to continue to grow. At that rate it

will also look for acquisitions with the intent to give themselves a broader geographic

presence and additional distribution capabilities for cloud and managed services.”

53. Addressing recent volatility in InterCloud’s share price, Defendant

Mylant shrugged it off as “reactionary moves” and assured it was “safe to say the

stock is back in the range that it’s used to trading. From a historical range perspective

- - 21 --


I believe the stock is right where it should be. Can Mr. Munro raise the value of the

stock from here? As I have already mentioned earlier, I believe the answer to this

question is yes. Investors can observe positive reaction to the announcement of the

acquisition on Friday, December 13th, as it significantly increases the revenue on a

yearly basis and is immediately accretive to earnings.” Moreover, “[a]s the company

continues to grow, I am watching it take steps to stay focused on shareholder value,

not growth at the expense of its shareholders.”

54. Defendant Mylant’s Article also noted, “While the company increased

revenue by 80% year-over-year, it also increased debt by 100%. It does not end here

though. The company raised $8 million in its October public offering and has been

chopping off debt since its September financials.” Further, “[s]ince the end of the

third quarter, the company has been able to eliminate nearly $10 million in liabilities

while raising more than $7.7 million in the public capital markets. This has opened up

the door for the company to grow its operating divisions.”

55. This Article concluded, “ If investors are looking for a company to invest

in the long-term for value and growth, I believe InterCloud could make a good

candidate. I believe this because I believe the CEO, Mark Munro, has the know-how

and ability to guide this company into a much larger and profitable entity. My words

are not merely speculation. The numbers behind the company since he has taken over

speak for themselves.”

- 22 -


56. As a result of Defendant Mylant’s bullish Article posted after the market

closed on December 17, 2013, InterCloud stock jumped to $10.46 per share on

December 18, 2013 on heavy trading volume, an increase of over 5% from the

previous day’s close of $9.89.

57. Moreover, upon information and belief, Defendant Mylant’s December

17, 2013 Article also assured investors of the following:

I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

58. The foregoing assurance violated seekingalpha.com ’s Terms of Use, see

supra ¶¶44-45, 3 and was materially false and misleading because, in reality,

Defendant Mylant was being paid by CSIR and InterCloud to enthusiastically tout the

Company’s stock. Further, Defendant Mylant failed to disclose that InterCloud

management, including Defendant Munro, was given the opportunity to review, edit,

and approve his Article before it was submitted for publication on seekingalpha.com .

In short, Defendant Mylant falsely represented that his research and conclusions on

3 To be sure, Defendant Mylant’s December 17, 2013 Article is no longer accessible on seekingalpha.com because, according to the site, all of Mylant’s “articles have been removed from Seeking Alpha due to a Terms of Use violation.” See John Mylant, Watch How InterCloud Grows Under The Guidance Of Mark Munro , Seeking Alpha (Dec. 17, 2013, 4:01 PM), http://seekingalpha.com/article/1903661-watch-how-intercloud-grows-under-the-guidance-of-mark-munro.

- 23 -


InterCloud were his own when, in fact, his December 17, 2013 Article was nothing

more than a paid advertisement for the Company. See infra ¶¶74-91.


Defendant Mylant’s Article was actually a paid promotion for InterCloud, written at


duty to investors to disclose that Defendant Mylant’s supposedly independent analysis


including Defendant Munro, prior to publication.

60. Defendant Mylant’s December 17, 2013 Article, which was also

reviewed and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was

thus false and misleading for omitting the above disclosures. Additionally and

independently, Defendants acted in concert to perpetuate a fraudulent scheme to

violate a standard set by Section 17(b) of the Securities Act, see infra ¶¶92-96,

promote the Company’s stock under the guise of independent research and analysis,

and thus manipulate the market for InterCloud stock to Plaintiff’s and the Class’s

detriment.

3. “InterCloud Systems: A Cloud Integrator With Strong Growth Potential,” Published on January 13, 2014

61. Similarly, on January 13, 2014, an Article entitled “InterCloud Systems:

A Cloud Integrator With Strong Growth Potential,” authored by “Kingmaker” –

- 24 -


another of Defendant Meyer’s pennames ( see supra note 2) – was posted on

seekingalpha.com . In that Article, InterCloud stock was touted as a small-cap stock

that has “the ability to generate outsized returns over the coming months and years.”

This was because “[t]he company has made several important announcements and the

marketplace has rewarded InterCloud Systems for its foresight.”

62. Defendant Meyer’s Article described InterCloud as “operating in one of

the hottest areas of the market which is poised for significant growth in the coming

years. The shares have already begun to participate in a rally that was long overdue.

Shares of InterCloud Systems have appreciated by nearly 350% since the beginning of

November . . . . That performance made InterCloud Systems one of the hottest and

best performing stocks of 2013. But now it’s time to look to the future to see if shares

will continue their rapid ascent. I believe they will.”

63. Advising investors in small-cap technology companies to pay attention to

those companies’ earnings growth, strategy, and technology, Defendant Meyer’s

Article touted: “InterCloud Systems appears to be firing on all 3 cylinders.” First, the

Company’s reported third quarter 2013 “earnings were so spectacular that the share

price soared by more than 250% during the following trading session.” Reported total

revenue of $16.2 million “represented a 448% year-over-year increase. The growth

occurred because of organic growth and strategic acquisitions. The company also had

a stellar performance because of its gross profit and net income numbers.”

- 25 -


64. Additionally, “[t]he company appears to be doing what is necessary for

increasing revenue growth while minimizing cost. This has led to a positive net

income which all investors will be sure to take notice of. Because of the company’s

market capitalization and funding needs, it’s also extremely important to take a look at

the company’s balance sheet, particularly the company’s cash balance. As of

September 30, 2013, InterCloud Systems had approximately $3.4 million in available

cash.”

65. Regarding liabilities, Defendant Meyer’s Article noted, “It’s important to

note that the company made an importance [sic] announcement regarding its balance

sheet on January 8, 2014. InterCloud announced that it had reduced its liabilities by

approximately $7.2 million as of the end of 2013. The reduction in liabilities

included” retiring preferred stock, paying down a $1.8 million promissory note, and

repayment of $1.8 million of principal. “Because of the growing revenue and rising

share price, it appears that InterCloud Systems will continue to be able to reduce

liabilities which will in turn help the company to continue minimizing its costs.”

66. Second, “[i]n addition to the phenomenal earnings growth shown thus

far, InterCloud Systems is also an ideal investment because of its strategy.” Third,

“[i]n addition to a growing revenue stream and a successful growth strategy,

InterCloud Systems also has the added benefit of being in an incredibly hot niche

within the technology sector called cloud.” With the cloud services market expected

- 26 -


to grow in the coming years, “[i]nvestors might be asking, ‘Cloud growth is expected

to increase but why will InterCloud benefit from that?’ The answer is simple.

InterCloud’s design has several significant advantages . . . .”

67. On the topic of risks, Defendant Meyer’s Article focuses on when to

invest, not whether : “It’s clear that InterCloud Systems appears to be on the right

path. But traders and investors should be aware of the risks. Given the rising

revenue, net income growth, and adequate cash balance, dilution doesn’t appear to be

a major concern. The concern I would have would be deciding on an appropriate

entry point for an investment. Given the rapid rise in valuation, investors may be

worried about an ill-timed investment. To combat that worry, investors may want to

consider scaling into a position.”

68. The Article concluded, “InterCloud Systems appears to be an extremely

promising small-cap technology company. Given that the stock market is at an all-

time high, investors need to think outside the box to identify companies that will

outperform. InterCloud Systems appears to be such an opportunity. Because of its

growing revenues, its unique strategy, and a hot technology niche, investors may want

to consider an investment in this company.”

69. InterCloud’s share price soared following publication of Defendant

Meyer’s overly confident Article. After closing at $15.35 on January 13, 2014,

InterCloud stock shot up to $17.03 on January 14, 2014, a nearly 11% increase on

- 27 -


extremely heavy trading volume. The next day, January 15, 2014, InterCloud stock

continued to rise to $18.13 per share on heavy trading volume. This two-day rally

amounted to an 18% gain for InterCloud stock.

70. Additionally, upon information and belief, in his January 13, 2014

Article, Defendant Meyer published a blatantly false assurance of his own

independence from InterCloud:

I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

71. The foregoing assurance violated seekingalpha.com ’s Terms of Use, see

supra ¶¶44-45, and was materially false and misleading because, in reality, Defendant

Meyer was being paid by CSIR and InterCloud to eagerly hype the Company’s stock.

Further, Defendant Meyer failed to disclose that InterCloud management, including

Defendant Munro, was given the opportunity to review, edit, and approve his Article

before it was submitted for publication on seekingalpha.com . In short, Defendant

Meyer falsely represented that his research and conclusions on InterCloud were his

own when, in fact, his January 13, 2014 Article was nothing more than a paid

advertisement for the Company. See infra ¶¶74-91.


Defendant Meyer’s Article was actually a paid promotion for InterCloud, written at


- 28 -


duty to investors to disclose that Defendant Meyer’s purportedly independent analysis


including Defendant Munro, prior to publication.

73. Defendant Meyer’s January 13, 2014 Article, which was also reviewed

and ratified by Defendants CSIR, InterCloud, Munro, and Petraglia, was thus false and

misleading for omitting the above disclosures. Additionally and independently,

Defendants acted in concert to perpetuate a fraudulent scheme to violate a standard set

by Section 17(b) of the Securities Act, see infra ¶¶92-96, promote the Company’s

stock under the guise of independent research and analysis, and thus manipulate the

market for InterCloud stock to Plaintiff’s and the Class’s detriment.

C. The Truth About Defendants’ Paid Promotional Scheme Is Revealed

74. The truth about Defendants’ paid promotional scheme was revealed

through a series of partial revelations beginning on March 13, 2014 when analyst

Richard Pearson released a report entitled, “Behind The Scenes With Dream Team,

CytRx And Galena” on seekingalpha.com . This report, attached hereto as Exhibit A,

revealed that stock promoter the DreamTeamGroup had attempted to hire him to write

paid promotional articles on such companies as CytRx Corp. (“CytRx”) and Galena

Biopharma, Inc. (“Galena”) without disclosing payment. Pearson’s exposé provided

detailed evidentiary support in the form of emails and attachments indicating that

CytRx and Galena management were intimately involved in reviewing, editing, and

- 29 -


approving the paid articles on their own stock, and were well aware that the articles

failed to disclose the paid marketing relationship.

75. Significant to InterCloud, Pearson’s report also revealed the aliases used

by DreamTeam’s writers to publish the promotional articles on third-party websites

like seekingalpha.com . At the heart of the scheme was Defendant Meyer, who

Pearson revealed to be DreamTeam’s ringleader of sorts. It was Defendant Meyer

who had first contacted Pearson by email and telephone to write the flattering articles

on CytRx and Galena. Defendant Meyer then introduced Pearson to Defendant

Mylant, who had already published numerous pro-CytRx and pro-Galena articles on

seekingalpha.com and thestreet.com . Defendant Mylant even confirmed to Pearson

that DreamTeam had paid him to write these pro-CytRx and pro-Galena articles, and

that management of each company had signed off on the articles first because “that is

what they are paying for.” Defendant Mylant confided in Pearson that he also wrote

for other investor relations firms as well, and that those firms paid him more

handsomely (a standard rate of $525 per article) than did DreamTeam, which only

offered $300 per article.

76. Pearson’s “Behind the Scenes” exposé further revealed that Defendant

Meyer often wrote under many aliases for multiple websites. Pertinent here,

Defendant Meyer’s pennames on seekingalpha.com were “Wonderful Wizard,”

“Equity Options Guru,” “Kingmaker,” and “Expected Growth.” Of course,

- 30 -


“Kingmaker” and “Equity Options Guru” also published bullish InterCloud Articles

around the same time during the Class Period. 4

77. On these revelations of a sophisticated network of undisclosed paid

promoters, some of whom had similarly written pro-InterCloud Articles during the

Class Period, InterCloud stock declined $1.19 per share, or over 9%, to close at

$11.91 per share on March 13, 2014 on unusually heavy trading volume.

78. Just days later, on March 17, 2014, the market learned greater detail of

InterCloud’s participation in this recently uncovered fraudulent promotional scheme.

Journalist Roddy Boyd of the Southern Investigative Reporting Foundation published

a report entitled “The Copper Archipelago: InterCloud” highly critical of the

Company. After providing a sordid history of InterCloud’s colorful corporate roots,

Boyd’s report, attached hereto as Exhibit B, outlined Defendants’ more recent

endeavors:

While InterCloud’s never-ending flow of press releases proclaiming its new opportunities in a popular sector have certainly attracted buyers, the company’s use of promoters—a classic sign of a penny stock—has kept the company in the spotlight, after a fashion. For example, last week RedChip Companies released a report that put a $47.10 price target on InterCloud’s shares. Looking and reading every bit as crisply as a standard brokerage report, investors might assume that the industry and

4 Shortly following the publication of Richard Pearson’s exposé, the articles previously posted by the complicit freelancer writers identified by Pearson (such as Defendants Meyer and Mylant) were summarily removed from the investor websites where the articles had originally appeared. Accordingly, most – if not all – of the paid promotional materials authored by these writers are no longer accessible.

- - 31 --


sales metrics cited for a likely 250% gain in share price were coming from someone who had independently weighted these arguments and made a bold call.

But that would be wrong: the Maitland Fla.-based RedChip is an investor relations firm whose strategy centers on putting out “research reports” written for, and approved by, its clients. In other words, they are press releases seeking to appeal to the marginally aware investor (RedChip’s work on behalf of its Chinese clients proved so damaging to investors that they dropped “coverage” of the sector in January 2013.)

For its work on InterCloud, the fine print at the bottom of the 14-page report discloses RedChip was paid 7,500 shares and is being paid a monthly cash fee for six months of investor relations work.

. . . an odd footnote to InterCloud’s promotional gambit was the appearance of a pair of articles on the stock market commentary website Seeking Alpha that touted InterCloud’s prospects, posted in December [2013] and in January [2014]. Authored by John Mylant and a writer using the pseudonym “Kingmaker,” the pieces strongly advocated for InterCloud’s bright prospects because of the talent of its management and the fast growth of the cloud computing sector.

Not disclosed was the fact that the authors[’] unflinching support for InterCloud was also a function of being paid to promote the shares. Last week, Rick Pearson, a West Coast-based investor, posted an article on Seeking Alpha describing how DreamTeamGroup, an investor relations firm ostensibly based in Indianapolis, solicited and paid writers to write enthusiastic, company reviewed and approved articles for release on Seeking Alpha, with the goal being to attract investors and drive up the share price.

According to Pearson, two of the more prolific DreamTeamGroup veiled touts were John Mylant and a man named Tom Meyer, a DreamTeamGroup employee who admitted to using the “Kingmaker” pseudonym.

(Mylant, who contacted the Southern Investigative Reporting Foundation after this story was posted, said he has regularly posted articles and comments on Seeking Alpha and that the opinions he expresses were his own. He acknowledges being contacted by a “Tom”—Mylant did not

- 32 -


recall his last name or company—who offered to pay him for articles written about companies he was already interested in. He said he is no longer working with “Tom.”)

[Lawrence] Sands [an InterCloud executive at the time] initially denied having heard of or used DreamTeamGroup but after being pressed on the matter said that he has “gotten maybe a few emails from them, stuff that got caught in the ‘spam’ filter.” He continued to argue that it was unlikely InterCloud used DreamTeamGroup for anything, however, since RedChip and a small New York firm, CSIR, were handling the company’s investor relations work. (CSIR founder Christine Petraglia said she had nothing to do with this issue, and said she provided InterCloud standard public- and investor relations services.)

79. Thus, Boyd’s exposé painted a more direct picture of InterCloud’s paid

promotional work with Defendants Mylant and Meyer, confirming: (i) InterCloud’s

relationship with CSIR; and (ii) the Company’s undisclosed financial relationships

with Defendants Mylant and Meyer, who both had stumped for InterCloud stock

throughout the Class Period. On this news, InterCloud stock declined $1.28 per share,

a nearly 11% drop, to close at $10.59 per share on March 18, 2014 on unusually heavy

trading volume.

80. On the heels of these revelations by Richard Pearson and Roddy Boyd,

the Rosen Law Firm announced after trading hours on March 20, 2014 that it was

investigating possible securities fraud claims against InterCloud in connection with its

undisclosed paid promotional scheme. Investors, now recognizing that Defendants’

fraud may result in significant financial exposure and/or SEC scrutiny, scrambled the

next day, sending InterCloud stock plummeting more than 28% , from a close of

- 33 -


$10.33 on March 20, 2014 to a close of $7.35 on March 21, 2014, on trading volume

nearly ten times the previous day’s volume.

81. Next, the ties between InterCloud, CSIR, Mylant, and Meyer became all

the more clear on March 27, 2014 when Pearson published a follow-up report to his

initial March 13, 2014 revelation. This follow-up, entitled “Behind The Scenes With

Proactive, Inovio And Unilife” and attached hereto as Exhibit C, shed further light on

InterCloud management’s hands-on role in the paid promotional scheme, particularly

that of Defendant Munro. Pearson revealed an email communication from CSIR

representative Herina Ayot, attached hereto as Exhibit D, seeking positive articles on

InterCloud stock to be published on seekingalpha.com . CSIR was looking for Pearson

“to develop convincing arguments around buying the stock,” and Ayot even admitted

that CSIR had “commissioned a few articles on ICLD already that you will find on

Seeking Alpha and Wall Street Cheat Sheet. This will give you an idea of the type of

article we like.”

82. In her email, Ayot promised that CSIR would pay Pearson $500 per

article and, importantly, advised that Defendant Munro would review each article

prior to publication: “I can set up a call with CEO if we need to. If you want to write

it, after you write, we would first send a draft to CEO for review and then have you

publish. We pay $500 to you upon publication. That’s per article.” Pearson’s

- 34 -


revelation thus provided the first direct link between InterCloud’s management and

the fraudulent promotional scheme.

83. Pearson’s March 27, 2014 report further confirmed Defendants Meyer

and Mylant’s involvement in the fraud:

Tom Meyer told me that he was paying John Mylant to write on Galena and other stocks. John was a prolific author who had written over 800 articles on Seeking Alpha and TheStreet.com . John then confirmed his paid activity in emails to me. John also introduced me to another IR firm he does work for, called CSIR.

*

The articles on InterCloud [published on Seeking Alpha and Wall Street Cheat Sheet, as referenced in Herina Ayot’s email] had been written by Mr. Meyer and Mr. Mylant, both of whom were working for multiple IR firms besides the Dream Team, such as CSIR.

84. On this news, InterCloud stock tumbled to $6.60 per share, a 10% drop

from the previous day’s close of $7.38, on unusually heavy trading volume.

85. Then, on April 2, 2014, Roddy Boyd published his own follow-up to his

“Copper Archipelago” report published weeks earlier on March 17, 2014. In this

April 2nd follow-up, entitled “The Copper Archipelago: Truth, Lies and InterCloud

Systems” and attached hereto as Exhibit E, Boyd noted that “[a] public relations firm

that hires authors to write flattering articles about a client[’]s prospects without

disclosing they are being compensated to do so isn’t just gaming public opinion, but is

running the risk of violating the Rule 17(b) of the Securities Act of 1933, which

mandates disclosure of an economic interest in the promotion or sale of securities.”

- 35 -


86. Further, in the face of a denial by InterCloud of having ever paid for

stock promotions, Boyd assured that he and the Southern Investigative Reporting

Foundation “stand by our work”:

Make no mistake: regardless of the findings of InterCloud’s former SEC attorney or the forcefulness of its press release, authors were clearly paid to publish favorable articles on InterCloud. Moreover, the shares increased in value during the time of this promotion, and according to the terms of the solicitation, senior management was allowed to see articles prior to publication. The only thing limiting the practice appears to have been the inability to find more authors willing to write on the company.

As it stands, InterCloud’s marketing strategy is already centered on using shareholder capital to whip-up short-term trading interest. Recall how the company retained the RedChip Companies, a Florida-based small-cap stock promotion outfit, paying them in cash and shares. RedChip’s signature move is to put out a lengthy, easy-reading press release constructed to look exactly like a brokerage firm’s report, including an astronomical “target price,” based on grave-seeming metrics that are equal parts surrealist fantasy and comedy.

The CSIR Group, a Manhattan based investor relations firm under contract to InterCloud, is the enterprise behind the practice that InterCloud’s chief executive Mark Munro formally assured investors was—after an internal investigation—inaccurate.

*

This email exchange [referenced above] between Rick Pearson (who used a pseudonym to pose as a prospective author of these articles) and Herina Ayot, an employee of CSIR, is evidence that CSIR was involved in recruiting and paying authors to write favorable, InterCloud-approved articles.

In the most direct terms possible, Ayot laid out to Pearson how CSIR sought an author for an article developing “convincing arguments for

- 36 -


buying the stock,” one that CEO Mark Munro would review. The author would be paid $500 upon publication of the article.

87. CSIR representative Herina Ayot confirmed to Boyd that “CSIR recruited

and paid writers to write pro-InterCloud articles.” Boyd reported having asked Ayot

about Defendant Petraglia denying such a practice at CSIR. Ayot told Boyd bluntly:

“Christine lied.” Ayot went on to explain, “In [Christine’s] defense, this is Wall

Street and everyone [lies.] We had no idea who you are or why you were asking those

questions; you might have been an investor or someone posing as one. We get

thousands of calls each day. So we lied to get rid of you.”

88. When pressed further on the seriousness of CSIR’s actions on behalf of

InterCloud, Ayot declined to comment on the specifics of CSIR’s work for InterCloud

but reiterated to Boyd: “You need to know that on Wall Street, everyone lies and we

lied to you to protect ourselves.”

89. Defendant Petraglia, CSIR’s founder, later contacted Boyd to clear up the

confusion, telling Boyd her “first instinct was to deny that we did this” when he had

pressed her about CSIR’s practice of paying for promotional articles without

disclosure. She confessed, “I don’t speak to many reporters and I guess I made a

mistake.”

90. More significantly, Defendant Petraglia went on to admit that CSIR had,

in fact, paid for promotional articles on InterCloud: “I never focused on this issue, and

I had never looked at Seeking Alpha before, so I didn’t comprehend that [the lack of

- 37 -


disclosure] was a problem.” Defendant Petraglia candidly explained to Boyd that it

had been Herina Ayot’s job to line up authors to write articles on behalf of CSIR

clients, including InterCloud, but that CSIR had since ceased doing “that kind of

work” for its clients.

91. Roddy Boyd also spoke with Defendant Mylant for his April 2nd follow-

up report. Mylant confirmed to Boyd that CSIR had approached him to write about

InterCloud and, like Defendant Petraglia, claimed ignorance of the disclosure issues

surrounding his publication practice. Defendant Mylant told Boyd, “I just thought it

was a way for me to earn extra money and write about what was interesting to me.”

D. The Undisclosed Paid Promotions Violated Section 17(b) of the Securities Act of 1933

92. Defendants’ failure to disclose Mylant’s and Meyer’s paid relationship

with CSIR and InterCloud also ran afoul of Section 17(b) of the Securities Act of

1933, further evidencing their Exchange Act Sections 10(b) and 20(a) violations.

93. Section 17(b) – commonly known as the “anti-touting” provision –

provides, in pertinent part, that anyone who advertises a stock, even if he does not

purport to offer the security for sale, must disclose the “consideration received or to be

received, directly or indirectly, from an issuer, underwriter, or dealer, the receipt,

whether past or prospective, of such consideration and the amount thereof.” 15 U.S.C.

§ 77q(b).

- 38 -


94. This anti-touting provision was enacted, in part, to “meet the evils of the

‘tipster sheet’ as well as articles in newspapers or periodicals that purport to give an

unbiased opinion but which opinions in reality are bought and paid for.” SEC v. Wall

St. Pub. Inst., Inc. , 851 F.2d 365, 376 (D.C. Cir. 1988) (quoting House Committee

Report, H.R. Rep. No. 85, 73d Cong., 1st Sess. 6 (1933)).

95. In an investor bulletin published by the SEC entitled “Microcap Stock: A

Guide for Investors,” the SEC provides information about investment in microcap

stocks and specifically warns of potential fraud, explaining: “Paid Promoters: Some

microcap companies pay stock promoters to recommend or ‘tout’ the microcap stock

in supposedly independent and unbiased investment newsletters, research reports, or

radio and television shows . . . . The federal securities laws require the publications to

disclose who paid them for the promotion, the amount, and the type of payment. But

many fraudsters fail to do so and mislead investors into believing they are receiving

independent advice.”5

96. Here, Defendants’ failure to disclose Meyer and Mylant’s receipt of

compensation for making material statements concerning InterCloud is considered a

material omission, SEC v. Curshen , 372 F. App’x 872, 881 (10th Cir. 2010) (citing

5 This SEC investor bulletin may be found at http://www.sec.gov/investor/pubs/microcapstock.htm.

- 39 -


Basic, Inc. v. Levinson , 485 U.S. 224, 232 (1988)), thus further supporting their

concomitant violations of Sections 10(b) and 20(a) of the Exchange Act.

E. Defendants Knew of, or Recklessly Disregarded that, the Paid Articles Were False and Misleading and Did Not Contain Appropriate Disclosures

97. Defendants acted with scienter in that they knew or recklessly

disregarded that the bullish InterCloud Articles disseminated by Defendants Meyer

and Mylant were materially false and misleading for their failure to disclose Meyer

and Mylant’s financial relationship with CSIR and InterCloud.

98. Defendant CSIR, by way of Defendant Petraglia and corporate

representative Herina Ayot, has publicly admitted to commissioning flattering Articles

on InterCloud stock that were reviewed and approved by InterCloud management but

failed to disclose that their authors were paid by CSIR and InterCloud.

99. In or around March 2014, Ayot admitted to Richard Pearson that CSIR

had commissioned several pro-InterCloud Articles that appeared on investor websites

seekingalpha.com and wallstcheatsheet.com . Those Articles, later revealed to have

been written by Defendants Meyer and Mylant (and possibly others), concealed the

fact that CSIR and InterCloud had paid the authors to tout InterCloud’s stock. Instead,

the Articles commissioned and published by Defendants were presented exactly as

Defendants wished: as independent research and analysis compiled by investing

- 40 -


experts who had come to their own conclusions that InterCloud’s stock was both

attractive and undervalued.

100. CSIR, again by way of Ayot, further admitted to Pearson that

InterCloud’s CEO, Defendant Munro, reviewed and approved the commissioned

Articles before they were submitted to seekingalpha.com or wallstcheatsheet.com for

publication. Thus, by CSIR’s own admission, InterCloud enjoyed full editing

discretion over promotional Articles that were published and presented to the

investing public as purportedly independent research and analysis.

101. Defendant Petraglia separately offered the same admissions to journalist

Roddy Boyd in or around April 2014 when she confirmed that CSIR had

commissioned pro-InterCloud Articles that failed to disclose the authors’ financial

relationships with CSIR and InterCloud. Recognizing the impropriety of this

deceptive promotional practice, Defendant Petraglia went on to assure Boyd that CSIR

no longer does “that kind of work” for its clients.

102. Each of the Defendants’ roles in their fraudulent scheme to promote

InterCloud stock – from Defendant Munro atop InterCloud, to Defendant Petraglia

atop CSIR, to Defendants Meyer and Mylant as InterCloud’s paid shills – has been

clearly defined and laid bare by the investigative journalism of Richard Pearson and

Roddy Boyd, both of whom extracted candid but damning admissions from one or

more of the Defendants.

- 41 -


103. As described above, Pearson’s and Boyd’s exposés meticulously outline

the means by which Defendants defrauded Plaintiff and other InterCloud investors by

way of paid Company promotions intentionally disguised as independent analyst

research. As Defendants Meyer and Mylant’s bullish InterCloud Articles were

separately reviewed and approved by Defendants CSIR, InterCloud, Munro, and

Petraglia before publication, all of the Defendants either knew, or recklessly

disregarded, that the commissioned Articles failed to disclose that they were, in fact,

commissioned, paid for, and edited and approved by Defendants CSIR and

InterCloud.

V. LOSS CAUSATION

104. As detailed throughout and further herein, Defendants’ fraudulent scheme

artificially inflated InterCloud’s stock price by misrepresenting and concealing the

Company’s illicit promotional campaign, including the facts that: (a) InterCloud hired

and paid CSIR to disseminate bullish Articles on the Company to boost InterCloud’s

share price; (b) through CSIR, InterCloud hired and paid third-party authors such as

Defendants Meyer and Mylant to write such bullish Articles; (c) InterCloud

management, including Defendant Munro, reviewed, edited, and approved the Articles

before they were submitted for publication by the authors; (d) the pro-InterCloud

Articles failed to disclose that their authors were being paid by CSIR and InterCloud

to tout the Company; and (e) the pro-InterCloud Articles similarly failed to disclose

- 42 -


that Defendant Munro and/or other InterCloud executives had reviewed, edited, and

approved the Articles prior to their publication.

105. Defendants’ false and misleading statements and omissions, individually

and collectively, concealed material information on the Company, resulting in

InterCloud’s stock being artificially inflated until, as indicated herein, the relevant

truth about its illicit promotional campaign was revealed. While each of these

misrepresentations and omissions was independently fraudulent, they were all

motivated by Defendants’ desire to artificially inflate InterCloud’s stock price and the

image of its future business growth. These false and misleading statements and

omissions, among others, had the intended effect of preventing the market from

learning the full truth and keeping the Company’s stock price artificially inflated

throughout the Class Period. Indeed, Defendants’ false and misleading statements and

omissions had the intended effect and caused, or were a substantial contributing cause

of InterCloud’s stock trading at artificially inflated levels, reaching as high as $19.39

during the Class Period.

106. The true picture about InterCloud’s fraudulent promotional campaign

was revealed in a series of partial revelations on: (a) March 13, 2014; (b) March 17,

2014; (c) March 20, 2014; and (d) March 27, 2014. These revelations indicated to the

market that Defendants’ prior Class Period statements were false and misleading.

- 43 -


A. March 13, 2014 Disclosure

107. The truth about InterCloud’s operations began to emerge on March 13,

2014, when analyst Richard Pearson first exposed the paid promotional scheme in a

report entitled, “Behind The Scenes With Dream Team, CytRx And Galena”

published on seekingalpha.com . Pearson’s exposé revealed that stock promoter the

DreamTeamGroup attempted to hire him to write paid promotional articles on certain

companies without disclosing such payment, and that some of the aliases used by

DreamTeam’s gang of paid writers were the same names who had penned similarly

bullish Articles on InterCloud during the Class Period.

108. As a result of this revelation that authors pumping InterCloud stock

during the Class Period had been implicated in a fraudulent paid promotional scheme

to similarly pump other stocks, InterCloud’s stock price declined 9%, from a close of

$13.10 on March 12, 2014 to a close of $11.91 on March 13, 2014, on abnormally

heavy trading volume nearly five times greater than the previous ten days’ average.

The market’s negative reaction to the March 13, 2014 revelation is demonstrated in

the following stock chart:

- 44 -


2000000

1800000

1600000

1400000

1200000

1000000

800000

U) 600000

400000

200000

0

13.2

13

12.8

12.6

12.4

12.2

12 ° 11.8

11.6

11.4

11.2

— Volume -•- Price

3/12/2014 3/13/2014

Date

109. The rapid decline in InterCloud’s stock price was the direct result of the

nature and extent of the revelations made to investors and the market regarding

InterCloud’s illicit marketing scheme. This decline would have been even more

significant had the March 13, 2014 article disclosed the full extent of Defendants’

undisclosed paid marketing campaign.

110. The timing and magnitude of InterCloud’s stock price decline from

March 12, 2014 through March 13, 2014 negates any inference that the losses suffered

by Plaintiff were caused by changed market conditions, macroeconomic or industry

factors, or Company-specific facts unrelated to Defendants’ fraudulent conduct. This

point is evidenced by the charts below, see infra ¶¶122-123, which demonstrate the

clear divergence of InterCloud’s stock price from the aggregate stock price of its peer

index as the revelations of the truth become known to the market.

- 45 -


B. March 17, 2014 Disclosure

111. A few days later, on March 17, 2014, journalist Roddy Boyd published a

report after hours entitled “The Copper Archipelago: InterCloud,” which was highly

critical of InterCloud. Boyd’s report revealed that the overly positive Articles bullish

on InterCloud were likely paid promotions emanating directly from Defendants.

112. As a result of the information revealed to the market on March 17, 2014,

InterCloud stock fell $1.28 per share on March 18, 2014, a nearly 11% drop from a

close of $11.87 on March 17, 2014 to a close of $10.59 per share on March 18, 2014,

on unusually heavy volume. The market’s negative reaction to Roddy Boyd’s March

17, 2014 revelations is demonstrated in the following stock chart:

1200000

1000000

800000

600000

400000

200000

0

12

11.5

11 Volume Price

0 10.5

10

9.5 3/17/2014 3/18/2014

Date



- 46 -


InterCloud’s use of undisclosed paid promoters, which had been concealed or

misrepresented by Defendants’ scheme and misstatements.




factors, or Company-specific facts unrelated to Defendants’ fraudulent conduct. This



index as the revelation of the truth became known to the market.

C. March 20, 2014 Disclosure

115. On March 20, 2014, on the heels of Richard Pearson’s and Roddy Boyd’s

revelations of Defendants’ illicit undisclosed promotional campaign, the Rosen Law

Firm announced an investigation of potential securities fraud claims against

InterCloud, alleging that insiders had paid outside parties to pump the Company’s

stock. The announcement was issued after trading hours. The investigation alleged

that authors John Mylant and “Kingmaker” had published glowing articles on

seekingalpa.com regarding the Company, which helped InterCloud stock rally from

$2.55 on November 14, 2013 to $18.13 on January 15, 2014, without disclosing that

they were paid to pump the stock. News of the Rosen Law Firm’s investigation was

- 47 -


published on numerous stock-related websites the following day, March 21, 2014,

including, among others, thestreet.com , crappystocks.com , and marketnewscall.com .


InterCloud stock dropped $2.98 a share, or more than 28%, from a close of $10.33 on

March 20, 2014 to a close of $7.35 on March 21, 2014, on abnormally heavy trading

volume nearly ten times the previous day’s volume. The market’s negative reaction

to the March 20, 2014 revelations is demonstrated in the following stock chart:

4000000

3500000

3000000 C)

2500000

2000000

1500000 U)

1000000

500000

0

11

10

9

8 0 0

7

6

5

Volume -•- Price

3/20/2014 3/21/2014

Date



InterCloud’s illicit undisclosed paid promotional campaign, which had been concealed

or misrepresented by Defendants’ scheme and misstatements.

- 48 -





factors, or Company specific facts unrelated to Defendants’ fraudulent conduct. This



index as the revelation of the truth became known to the market.

D. March 27, 2014 Disclosure

119. Then, on March 27, 2014, at 9:45 a.m., a follow-up report written by

Richard Pearson entitled “Behind The Scenes With Proactive, Inovio And Unilife,”

was published on seekingalpha.com revealing that, by Defendants’ own admissions,

CSIR had commissioned paid Articles on InterCloud during the Class Period, and

Defendant Munro had reviewed those Articles prior to their publication. Pearson’s

follow-up report thus provided the first direct link between InterCloud’s management

and the undisclosed paid promotional campaign.


the market cast doubt on the veracity of Defendants’ prior statements, causing

InterCloud stock to sink $0.78 a share, or approximately 10%, from a close of $7.38

on March 26, 2014 to a close of $6.60 on March 27, 2014, on abnormally heavy

- 49 -


trading volume. The market’s negative reaction to the March 27, 2014 revelations is

demonstrated in the following stock chart:

700000

600000

• 500000 C)

E 400000

300000

Cl) 200000

100000

0

7.6

7.4

7.2

7 12 Volume Price

0 6.8

6.6

6.4

6.2 3/26/2014 3/27/2014

Date



InterCloud’s illicit undisclosed paid promotions, which had been concealed or

misrepresented by Defendants’ scheme and misstatements.


3/26/2014



factors, or Company specific facts unrelated to Defendants’ fraudulent conduct. This

point is evidenced by the chart below, which demonstrates the clear divergence of

- - 50 - 50 -

InterCioud Systems (ICLD) vs. NASDAQ Composite (CCMP), NASDAQ Computer (IXK) and PEER (Peer) Index

100

90

-' C) -

80 ! COP -

-

Eu 0 D

60

50


InterCloud’s stock price from the aggregate stock price of its peer index 6 as the

revelation of the truth became known to the market:

$14

$13

$12

) $11 U

w

:

$8

$7

$6

0 0 0 0 0 0 0 a 0 0 P1 N N

- - - - - - - - C4 C4 N a C5 a

6 InterCloud’s peer index is comprised of the following publicly traded companies in the IT Services industry, as compiled by experts at thestreet.com : Edgewater Technology Inc. (EDGW); NCI Inc. (NCIT); Sysorex Global Holding Corp. (SYRX); Cartesian Inc. (CRTN); CSP Inc. (CSPI); Computer Task Group Inc. (CTG); Mattersight Corp. (MATR); and Widepoint Corp. (WYY). See InterCloud Systems Inc PEER GROUP: IT Services , TheStreet Ratings, http://www.thestreet.com/r/ratings/reports/peergroup/ICLD.html.

- - 51 --


123. Additionally, the following chart demonstrates the clear divergence of

InterCloud’s stock price from the aggregate stock price of its peer index during the

Class Period and as the revelations of truth on March 13, 17, 20, and 27, 2014 became

known to the market:

124. In sum, the rapid declines in InterCloud’s stock price following the

March 13, 17, 20, and 27, 2014 disclosures were the direct result of the nature and

extent of the revelations made to investors and the market regarding InterCloud’s

illicit undisclosed promotional campaign, and their resulting financial impact, all of

which had been concealed or misrepresented by Defendants’ scheme and

misstatements. Thus, the revelations of truth, as well as the resulting clear market

reaction, support a reasonable inference that the market understood that prior

- 52 -


statements concerning InterCloud were false and misleading. In short, as the truth

about Defendants’ prior misrepresentations and concealments was revealed, the

Company’s stock price quickly sank, the artificial inflation came out of the stock, and

Plaintiff was damaged, suffering true economic losses.

125. Accordingly, the economic loss, i.e. , damages, suffered by Plaintiff on

March 13, 18, 21, and 27, 2014 was a direct and proximate result of Defendants’

scheme and misrepresentations and omissions that artificially inflated InterCloud’s

stock price and the subsequent significant decline in the value of InterCloud’s stock

when the truth concerning Defendants’ prior misrepresentations and fraudulent

conduct entered the marketplace.

VI. PRESUMPTION OF RELIANCE

126. Plaintiff is entitled to a presumption of reliance under Affiliated Ute

Citizens of Utah v. United States , 406 U.S. 128 (1972), because the claims asserted

herein are primarily predicated upon omissions of material fact which there was a duty

to disclose. Specifically, Plaintiff is entitled to a presumption of reliance throughout

the Class Period because, as more fully alleged above, the Defendants failed to

disclose material information regarding InterCloud’s illicit promotional campaign.

127. Plaintiff also is entitled to a presumption of reliance under the fraud-on-

the-market doctrine for Defendants’ material misrepresentations, because the market

for InterCloud’s publicly traded securities was open, well-developed, and efficient at

- 53 -


all times. As a result of these materially false and misleading statements, InterCloud’s

publicly traded securities traded at artificially inflated prices during the Class Period.

Plaintiff and other members of the Class purchased or otherwise acquired InterCloud’s

publicly traded securities relying upon the integrity of the market price of those

securities and the market information relating to InterCloud, and have been damaged

thereby.

128. At all relevant times, the market for InterCloud’s securities was an

efficient market for the following reasons, among others:

(a) InterCloud’s stock met the requirements for listing and was listed

and actively traded on the NASDAQ, a highly efficient and automated market;

(b) as a regulated issuer, InterCloud regularly made public filings with

the SEC, including its Forms 10-K, Forms 10-Q, and related press releases; and

(c) InterCloud regularly communicated with public investors via

established market communication mechanisms, including through regular

disseminations of press releases on the national circuits of major newswire services

and through other wide-ranging public disclosures, such as communications with the

financial press, and other similar reporting services.

129. As a result of the foregoing, the market for InterCloud securities

promptly digested current information regarding InterCloud from all publicly

- 54 -


available sources and reflected such information in the prices of InterCloud’s

securities.

130. Under these circumstances, all purchasers of InterCloud’s securities

during the Class Period suffered similar injury through their purchase of InterCloud’s

securities at artificially inflated prices and a presumption of reliance applies.

131. At the times they purchased or otherwise acquired InterCloud’s

securities, Plaintiff and other members of the Class were without knowledge of the

facts concerning the wrongful conduct alleged herein and could not reasonably have

discovered those facts. As a result, the presumption of reliance applies.

132. In sum, Plaintiff will rely, in part, upon the presumption of reliance

established by the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations during the Class

Period;

(b) the misrepresentations were material;

(c) the Company’s securities traded in an efficient market;

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

investor to misjudge the value of the Company’s securities; and

(e) Plaintiff and the other members of the Class purchased the

Company’s securities between the time Defendants misrepresented material facts and

- 55 -


the time the true facts were disclosed, without knowledge that the facts were

misrepresented.

VII. NO SAFE HARBOR

133. The federal statutory safe harbor provided for forward-looking statements

under certain circumstances does not apply to any of the allegedly false and

misleading statements pled in this complaint. Many of the specific statements pled

herein were not identified as “forward-looking statements” when made. To the extent

there were any forward-looking statements, there were no meaningful cautionary

statements identifying important factors that could cause actual results to differ

materially from those in the purportedly forward-looking statements. Indeed, the risk

warnings that may have been provided by Defendants in their Class Period statements

were not meaningful, were themselves false and misleading, and did not shield

Defendants from liability on the basis that such statements were “forward-looking.”

134. Alternatively, to the extent that the statutory safe harbor does apply to

any forward-looking statements pled herein, Defendants are liable for those false and

misleading forward-looking statements because, at the time each of those forward-

looking statements was made, as detailed above, the particular speaker knew that the

particular forward-looking statement was false or misleading and/or the forward-

looking statement was authorized and/or approved by an executive officer of

InterCloud who knew that those statements were false or misleading when made.

- 56 -


Moreover, to the extent that Defendants issued any disclosures designed to “warn” or

“caution” investors of certain “risks,” those disclosures were also false and misleading

since they did not disclose that Defendants were actually engaging in the very actions

about which they purportedly warned and/or had actual knowledge of material adverse

facts undermining such disclosures.

VIII. PLAINTIFF’S CLASS ACTION ALLEGATIONS

135. Plaintiff brings this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who

purchased or otherwise acquired the publicly traded common stock of InterCloud

between December 3, 2013 and March 27, 2014, inclusive, and who were damaged

thereby. Excluded from the Class are Defendants, the officers and directors of the

Company, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors, or assigns, and any entity in which Defendants have

or had a controlling interest.

136. Because InterCloud has millions of shares of stock outstanding and

because the Company’s shares were actively traded on the NASDAQ, members of the

Class are so numerous that joinder of all members is impracticable. According to

InterCloud’s SEC filings, as of shortly after the close of the Class Period, InterCloud

had just over 10 million shares outstanding. While the exact number of Class

members can only be determined by appropriate discovery, Plaintiff believes that

- 57 -


Class members number at least in the thousands and that they are geographically

dispersed.

137. Plaintiff’s claims are typical of the claims of the members of the Class

because Plaintiff and all of the Class members sustained damages arising out of

Defendants’ wrongful conduct complained of herein.

138. Plaintiff will fairly and adequately protect the interests of the Class

members and has retained counsel experienced and competent in class actions and

securities litigation. Plaintiff has no interests that are contrary to, or in conflict with,

the members of the Class it seeks to represent.

139. A class action is superior to all other available methods for the fair and

efficient adjudication of this controversy since joinder of all members is

impracticable. Furthermore, as the damages suffered by individual members of the

Class may be relatively small, the expense and burden of individual litigation make it

impossible for the members of the Class to individually redress the wrongs done to

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

140. Questions of law and fact common to the members of the Class

predominate over any questions that may affect only individual members in that

Defendants have acted on grounds generally applicable to the entire Class. Among

the questions of law and fact common to the Class are:

- 58 -


(a) whether Defendants violated the federal securities laws as alleged

herein;

(b) whether Defendants’ publicly disseminated press releases and

statements during the Class Period omitted and/or misrepresented material facts;

(c) whether Defendants failed to convey material facts or to correct

material facts previously disseminated;

(d) whether Defendants participated in and pursued the fraudulent

scheme or course of business complained of herein;

(e) whether Defendants acted willfully, with knowledge or severe

recklessness, in omitting and/or misrepresenting material facts;

(f) whether the market prices of InterCloud’s securities during the

Class Period were artificially inflated due to the material nondisclosures and/or

misrepresentations complained of herein; and

(g) whether the members of the Class have sustained damages as a

result of the decline in value of InterCloud’s stock when the truth was revealed and

the artificial inflation came out, and, if so, what is the appropriate measure of

damages.

- 59 -


COUNT I FOR VIOLATIONS OF SECTION 10(b) OF THE

EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS

141. Plaintiff repeats and realleges the allegations set forth above as though

fully set forth herein. This claim is asserted against all Defendants.

142. During the Class Period, Defendants, individually and collectively,

carried out a plan, scheme and course of conduct which was intended to and,

throughout the Class Period, did: (i) deceive the investing public, Plaintiff, and the

other Class members, as alleged herein; (ii) artificially inflate and maintain the market

price of InterCloud’s publicly-traded securities; and (iii) cause Plaintiff and the other

members of the Class to purchase InterCloud’s publicly-traded securities at artificially

inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct,

Defendants, individually and collectively, took the actions set forth herein.

143. These Defendants: (a) employed devices, schemes, and artifices to

defraud; (b) made untrue statements of material fact and/or omitted to state material

facts necessary to make the statements not misleading; and/or (c) engaged in acts,

practices, and a course of business which operated as a fraud and deceit upon the

purchasers of the Company’s securities in an effort to maintain artificially high market

prices for Company’s securities in violation of Section 10(b) of the Exchange Act and

Rule 10b-5. These Defendants are sued as primary participants in the wrongful and

- 60 -


illegal conduct charged herein. Defendants Munro and Petraglia are also sued as

controlling persons of InterCloud and CSIR, as alleged below.

144. In addition to the duties of full disclosure imposed on Defendants as a

result of their making affirmative statements and reports, or participating in the

making of affirmative statements and reports to the investing public, they each had a

duty to promptly disseminate truthful information that would be material to investors

in compliance with the integrated disclosure provisions of the SEC as embodied in

SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17 C.F.R. §229.10, et seq .)

and other SEC regulations, including accurate and truthful information with respect to

the Company’s operations, sales, product marketing and promotion, financial

condition, and operational performance so that the market prices of the Company’s

publicly traded securities would be based on truthful, complete, and accurate

information.

145. Defendants, individually and in concert, directly and indirectly, by the

use, means, or instrumentalities of interstate commerce and/or of the mails, engaged

and participated in a continuous course of conduct to conceal adverse material

information about InterCloud’s fraudulent practices, as specified herein.

146. These Defendants each employed devices, schemes, and artifices to

defraud, while in possession of material adverse non-public information and engaged

in acts, practices, and a course of conduct as alleged herein in an effort to assure

-- 61 --


investors of InterCloud’s value, performance and continued substantial sales and

financial growth, which included the making of, or the participation in the making of,

untrue statements of material facts about InterCloud’s growth and omitting to state

material facts necessary in order to make the statements made about the growth not

misleading in light of the circumstances under which they were made, as set forth

more particularly herein, and engaged in transactions, practices, and a course of

business which operated as a fraud and deceit upon the purchasers of InterCloud’s

securities during the Class Period.

147. Defendants’ primary liability and controlling person liability arise from

the following facts, among others: (i) Defendants Munro and Petraglia were high-

level executives at the Company and CSIR during the Class Period; (ii) Defendants,

by virtue of their responsibilities and activities, were privy to, and participated in, the

creation, development, and reporting of the Company’s sales, marketing, projections,

reports, articles, and other communications; (iii) Defendants enjoyed significant

personal contact and familiarity with, were advised of, and had access to Defendant

Munro as well as the Company’s internal reports, and other data and information

about the Company’s trends and promotional activities at all relevant times; and (iv)

Defendants were aware of the Company’s dissemination of information to the

investing public which they knew or recklessly disregarded was materially false and

misleading.

- 62 -


148. Each of the Defendants had actual knowledge of the misrepresentations

and omissions of material facts set forth herein, or acted with severely reckless

disregard for the truth, in that each failed to ascertain and disclose such facts, even

though such facts were available to each of them. Such Defendants’ material

misrepresentations and/or omissions were done knowingly or with deliberate

recklessness and for the purpose and effect of concealing information regarding the

Company’s true condition from the investing public and supporting the artificially

inflated price of its securities. As demonstrated by Defendants’ misstatements and

omissions throughout the Class Period regarding InterCloud, Defendants, if they did

not have actual knowledge of the misrepresentations and omissions alleged, were

reckless in failing to obtain such knowledge by deliberately refraining from taking

those steps necessary to discover whether those statements were false or misleading.

149. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market prices

of InterCloud’s securities were artificially inflated during the Class Period. In

ignorance of the fact that market prices of InterCloud’s publicly traded securities were

artificially inflated, and relying directly or indirectly on the false and misleading

statements made by Defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known

to, or disregarded with deliberate recklessness by, Defendants but not disclosed in

- 63 -


public statements by Defendants during the Class Period, Plaintiff and the other

members of the Class acquired InterCloud’s securities during the Class Period at

artificially high prices and were damaged thereby, as evidenced by, among others, the

stock price declines above.

150. At the time of said misrepresentations and omissions, Plaintiff and the

other members of the Class were ignorant of their falsity and believed them to be true.

Had Plaintiff and the other members of the Class and the marketplace known of

Defendants’ fraudulent practices, the true nature and prospects of its business, or

InterCloud’s true intrinsic value, which were not disclosed by Defendants, Plaintiff

and the other members of the Class would not have purchased or otherwise acquired

their InterCloud publicly traded securities during the Class Period; or, if they had

acquired such securities during the Class Period, they would not have done so at the

artificially inflated prices which they paid.

151. By virtue of the foregoing, Defendants have each violated Section 10(b)

of the Exchange Act and Rule 10b-5 promulgated thereunder.

152. As a direct and proximate result of Defendants’ wrongful conduct,

Plaintiff and the other members of the Class suffered damages in connection with their

respective purchases and sales of the Company’s securities during the Class Period, as

evidenced by, among others, the stock price declines discussed above, when the

artificial inflation was released from InterCloud’s stock.

- 64 -


COUNT II FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST DEFENDANTS MUNRO AND PETRAGLIA

153. Plaintiff repeats and realleges the allegations set forth above as though

fully set forth herein. This claim is asserted against Defendants Munro and Petraglia.

154. Defendants Munro and Petraglia acted as controlling persons of

InterCloud and CSIR, respectively, within the meaning of Section 20(a) of the

Exchange Act as alleged herein. By virtue of their high-level positions, participation

in, and/or awareness of, their respective company’s operations, and/or intimate

knowledge of their respective company’s fraudulent practices, Defendants Munro and

Petraglia had the power to influence and control, and did influence and control,

directly or indirectly, the decision-making of their respective companies, including the

content and dissemination of the various statements which Plaintiff contends are false

and misleading. Defendants Munro and Petraglia were provided with, or had

unlimited access to, copies of the articles, reports, and other communications alleged

by Plaintiff to be misleading prior to and/or shortly after these statements were issued

and had the ability to prevent the issuance of the statements or cause the statements to

be corrected.

155. In addition, Defendants Munro and Petraglia had direct involvement in

the day-to-day operations of their respective companies and, therefore, are presumed

- 65 -


to have had the power to control or influence the particular transactions giving rise to

the securities violations as alleged herein and exercised the same.

156. As set forth above, Defendants each violated Section 10(b) and Rule 10b-

5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, Defendants Munro and Petraglia are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of Defendants Munro and

Petraglia’s wrongful conduct, Plaintiff and other members of the Class suffered

damages in connection with their purchases of the Company’s securities during the

Class Period, as evidenced by, among others, the stock price declines discussed above,

when the artificial inflation was released from InterCloud’s stock.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff, on his own behalf and on behalf of the Class, prays

for relief and judgment, as follows:

A. Declaring that this action is a proper class action and certifying Plaintiff

as class representative pursuant to Rule 23 of the Federal Rules of Civil Procedure and

Plaintiff’s counsel as Class Counsel for the proposed Class;

B. Awarding compensatory damages in favor of Plaintiff and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a

result of Defendants’ wrongdoing, in an amount to be proven at trial, including

interest thereon;

- 66 -


C. Awarding Plaintiff and the Class their reasonable costs and expenses

incurred in this action, including attorneys’ fees and expert fees; and

D. Such other and further relief as the Court deems appropriate.

JURY DEMAND

Plaintiff hereby demands a trial by jury.

DATED: January 9, 2015 COHN LIFLAND PEARLMAN HERRMANN & KNOPF LLP

/s/ Peter S. Pearlman PETER S. PEARLMAN

JEFFREY W. HERRMANN Park 80 West – Plaza One 250 Pehle Avenue, Suite 401 Saddle Brook, NJ 07663 Telephone: 201/845-9600 201/845-9423 (fax) [email protected] [email protected]

Liaison Counsel

ROBBINS GELLER RUDMAN & DOWD LLP

JACK REISE 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected]

- 67 -


ROBBINS GELLER RUDMAN & DOWD LLP

SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected]

Lead Counsel for Plaintiffs

- 68 -


CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on January 9, 2015, I authorized the electronically

filed of the foregoing with the Clerk of Court using the CM/ECF system, which will

send a Notice of Electronic Filing to all counsel of record.

/s/ Peter S. Pearlman PETER S. PEARLMAN

- 69 -

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