2 Consolidated Amended Class Action Complaint 11/13/2001

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The Honorable Robert S Lasnik

I

FILEDooG ~-, ENTERED

ED ___RECEIVED

NOY 13 2001 KNLERK U S D S RICECDl1R7~► ~RfV 4f5TRfCT

OF WASHINC,70NDEPUTY

UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WASHINGTON

)IN RE NETWORK COMMERCE, INC )SECURITIES LITIGATION ) No COI-0675L

} CONSOLIDATED AMENDED} CLASS ACTION COMPLAINT

THIS DOCUMENT RELATES TO. )} JURY TRIAL DEMANDED

ALL ACTIONS )

i IfIIIII III i III IN III IfIIi I II III IIII 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 I NIllllf 1111111111 fill 111111 111111111 IN INCV 01-00675 4000000 .10

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• sTABLE OF CONTENTS

Page

NATURE OF ACTION . .. I

Violations of Exchange Act 1

Violations of Security Act . .5

Proxy Violations . . . . . . . . . . . . . . . . . . 6

JURISDICTION AND VENUE . . . . . . . . . . . . .. 7

PARTIES . . . . . . . . . . . . . . . . . . . 7

Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . .7

Network Commerce Defendants . . . . . . 8

IPO Underwriter Defendants . 10

SPO Underwriter Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11

CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

NO STATUTORY SAFE HARBOR .. 15

SUBSTANTIVE ALLEGATIONS COMMON TO NON-PROXY VIOLATIONS OF THEEXCHANGE ACT. 1 6

Defendant Walker 's Illegal Windfall . . . . . . . . . . . . . . . . . . . . . . . 16

The Company Reported Fraudulently Inflated Numbers . . 17

Statements Regarding Numbers of Merchants, Subscribers, And Visitors . . . . . 17

The Statements Regarding Numbers of Merchants, Subscribers,and Visitors Were Fraudulent. 2 1

The Company Reported Fraudulent Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Statements Regarding Company Revenue . . . . .. . . . . . . . . . . . . . . . . . . 23

The Statements Regarding Revenue Were Fraudulent . . . . . . . . . . . . . . . . . . . . . . . .25

Further Fraudulent Statements During Balance of Class Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

The Truth Begins To Emerge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

The Truth Is Revealed.

SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONS OF THE SECURITIE SACT .. 47

Materially False And Misleading Statements in Connection with the Initial Public Offering . .47

Materially False and Misleading Registration Statement in Connectionwith the Secondary Public Offering . . . . . . . . . . . . . . . . . . . 52

Materially False and Misleading Statements In Connection With The Ubarter Merger . . . . . 56

SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONS OF SECTION 14(A) O FTHE EXCHANGE ACT . . . . . . . . . . 61

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Materially False and Misleading Statements in Connection with the April 19, 2000 ProxyStatement 6 1

ADDITIONAL SCIENTER ALLEGATIONS . . . . . . . . 63

WALKER'S UNDISCLOSED AND/OR UNLAWFUL PROFITS . . . . . . . . . . . 64

The Executive Compensation Plan 65

Continued Need for Financing . 66

FRAUD-ON-THE-MARKET ALLEGATIONS . . . . . . . . 67

COUNT I . . . . . . . . . . 68

COUNT II . 70

COUNT III . . . . . . . . . . 71

COUNT IV, . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

COUNT V . . . . . . . . . . . . . . 73

COUNT VI 74

COUNT VII . . . . . . . . . . . . . . . 76

COUNT VIII . . . . . . . . . . . . . . . . . . . . . . . . 78

COUNT IX . . . . . . . . . . . . . . . . . . 79

PRAYER FOR RELIEF 80

JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 1

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Plaintiffs, individually and on behalf of all other persons similarly situated, by thei r

undersigned attorneys, for their complaint, allege upon personal knowledge as to themselves and

their own acts, and upon information and belief as to all others matters, based upon the investigation

made by and through their attorneys, which investigation included, inter alia, interviews with

material witnesses and review of documents cited herein, including the promissory notes,

employment agreements, Network Commerce's filings with the Securities and Exchange

Commission ("SEC"), news reports, press releases, and other publicly available documents of

Network Commerce Inc . ("Network Commerce" or the "Company" )

NATURE OF ACTION

I Plaintiffs bring this action as a class action on behalf of themselves and all othe r

persons who purchased the securities of Network Commerce during the period September 28, 1999

through and includmg April 16, 2001 (the "Class Period"), to recover damages from violations of

Sections 10(b), 14(a) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15

U.S.C. § 78), 78n (a), and 78t, and Rules I Ob -5 and 14a-9, 17 C.F.R. §§ 240.1 Ob-5 and 240.14a-9,

promulgated thereunder ; and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the

"Securities Act"), 15 U S C §§ 77k, 771, and 77o

Violations of Exchange Act

2 During the Class Period, defendants Network Commerce and its CEO, defendan t

Dwayne M Walker, created and implemented a scheme designed to artificially inflate the price of

the Company's stock while at the same time concealing the true value of the Company's business .

The implementation of the scheme began with defendants Network Commerce and Walker making

materially false and misleading statements in connection with the Company's IPO, SPO, and Ubarter

Merger, as discussed herein Each registration statement and prospectus, as well as quarterly and

annual financial reports filed with the SEC during the Class Period, failed to disclose that the

Company had made substantial so-called loans to defendant Walker and failed to disclose that thes e

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undisclosed payments were secured only by the unvested stock options held by defendant Walker

The so-called loans were not simply a one-time event but became a method of doing business at

Network Commerce, with Walker taking frequent and undisclosed "draws" from the corporate

treasury that totaled millions of dollars during the relatively short Class Period. The actions of

defendants Network Commerce and Walker constituted a violation of Sections 10(b) and 20 of the

Exchange Act .

3 The so-called loans constituted a senior executive perquisite that was never revealed

to the investing public during the Class Period These so-called loans were designed to allow, and

had the effect of allowing, defendant Walker to guarantee himself a minimum sale price for his stock

options without giving up anything If the stock price went down and the options became worthless,

defendant Walker would keep the money from the Company in exchange for worthless stock

options This was in essence an undisclosed short sale On the other hand, if the share price

increased and the options had value, defendant Walker could repay the loans and keep all the profits

Thus, the Company not only granted defendant Walker stock options as part of his compensation but

arranged a scheme whereby defendant Walker could take all of the potential reward from the options

while the Company would keep all of the risk .

4. Through just the so-called loan component of Network Commerce ' s and Walker' s

scheme, defendant Walker took $4 5 million from the Company in the first 14 months after the IPO .

Defendant Walker never paid back a penny on these loans and thus the scheme left the Company

with a $4.5 million loss The fact that these transactions were not disclosed to shareholders and the

markets made the scheme even more egregious .

5 Network Commerce 's and Walkers 's materially false and misleading statements

during the Class Period served to enhance the personal wealth of defendant Walker at the expense o f

the Company's shareholders. When Network Commerce could no longer afford to make six- o r

seven-figure undisclosed payments to Walker or other executives as so-called loans, Walker resorte d


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to sales on the open market of his shares as soon as they were free of the restrictions imposed by the

IPO and SPO. While the Network Commerce Defendants' public statements served to bolster the

stock price, Walker sold hundreds of thousands of shares of Company stock at prices inflated by the

repeated materially false and misleading statements Through this fraudulent scheme, Walker

realized more than $2 4 million in proceeds from the sale of more than 900,000 shares of Network

Commerce stock This was in addition to the $4 5 million in proceeds realized by Walker through

"loans" from the Company .

6 In furtherance of this scheme to artificially inflate the price of the Company's stock ,

defendants Network Commerce and Walker knowingly or with deliberate recklessness distributed to

the investing public materially false and misleading financial statements and press releases

concerning the Company's financial condition and performance. From the Company's birth as a

public company in September 1999 through December 2000, defendants Walker and Network

Commerce convinced the market that its business was growing exponentially by releasing inflated

numbers of users of its products and services that bore no relation to the generation of revenue.

They also released information concerning the Company's growth of revenue, earnings, and ability

to achieve profitability that was inflated by the Company's premature recognition of revenue At the

same time, Walker and Network Commerce failed to disclose known facts that directly contradicted

their public statements, including that (i) Network Commerce's consumer website, ShopNow .com

("ShopNow"), touted by the Network Commerce Defendants as a leading shopping site, was to be

discontinued; (ii) most of the business acquisitions and investments made during the Class Period,

which cost the Company approximately $214 million, were already substantially impaired and

would result in write-offs of $142 2 million ; and (iii) the Company had violated several material debt

covenants under its bank credit agreement and was in default and subject to acceleration of all

amounts due


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• •7. As a result of these materially false and misleading statements, the market prices of

the Company's securities were artificially inflated during the Class Perio d

8 By January 2001, with the Company's fiscal year 2000 annual financial statement s

being reviewed by its outside auditors and in the wake of the abrupt departure in December 2000 of

the Company's Chief Financial Officer, Alan Koslow, Walker and Network Commerce were no

longer able to hide the true condition of the Company. On January 23, 2001, they revealed in a press

release that (1) the Company planned to shut down ShopNow in the first quarter of 2001, previously

described by them in a May 18, 2000 press release as "a leading shopping network and directory,"

(ii) the Company would reduce its workforce by 145 employees, and (iii) take other cost-cutting

measures

9 Days later, in a January 29, 2001 press release, Walker and Network Commerce

belatedly revealed that (1) the Company would recognize an impairment charge of $124.5 million in

the fourth quarter of 2000 reflecting the value of its failed business acquisitions and investments in

other companies, including Ubarter ; (ii) the Company incurred $16 8 million in restructuring charges

mostly from the shut-down of low-margin businesses ; (iii) the Company was materially out of

compliance with working-capital covenants under its bank credit agreement ; and (iv) unless the

circumstances of the Company changed, its auditors would issue a "going concern" opinion in the

Company's annual report .

10 The revelations in January 2001 were stunning in that they directly contradicted

Walker's and Network Commerce's previous statements in press releases, some made as recently as

the month before. The news shocked the market and sent the Company's stock plunging from

$1 .325 per share to $0 75 per share on January 24, 2001, to close at $ .9375 per share, down nearly

30 percent from the previous day's close. The revelations on January 29, 2000 sent the Company's

stock down a further fifteen percent, from $0 .8125 per share on January 29, 2001 to close at $0 687 5


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1 •per share on January 31, 2001 The stock price represented a 97 percent drop from the Class Perio d

high of $23 4375 per share.

11 In the company's Annual Report for fiscal year 2000 filed on form 10-K with the

SEC (the "2000 Form 10-K"), filed nearly two months late, the Company revealed the truth about

the transactions between defendant Walker and the Company - namely, that the various promissory

notes had been consolidated from several notes totaling $4 5 million into a single $3 8 million note .

Furthermore, this single note would be fully repaid with 1 .4 million shares of Company stock at the

market value on the date of the transfer. On the date of the agreement, those shares were valued at

only $223,930 93 . The 2000 Form 10-K also revealed that the Company would lay off additional

employees, close another division, and faced the real possibility of bankruptcy

12. The market reacted with surprise to the news , sending the stock price of the Company

down from $0 156 to close at $0.125 on April 18, 2001, another decrease of nearly 20 percent .

13. After trading below one dollar per share for many months despite a one-for-fifteen

I reverse stock split on June 15 , 2001, the Company 's common stock was delisted from the NASDA Q

on or about August 29, 2001 for failing to meet the minimum bid price requirement of one dollar pe r

share

Violations of Security Act

14. During the Class Period, defendants Network Commerce, the IPO and SPO

Defendants, and Walker disseminated to the investing public materially false and misleading

registration statements and prospectuses related to Network Commerce's Initial Public Offering on

or about September 29, 1999 ("IPO"), Secondary Public Offering on or about February 16, 2000

("SPO"), and acquisition of Ubarter .com on June 1, 2000 (the "Ubarter Merger"). Each registration

statement and prospectus failed to disclose the issuance of so-called loans to defendant Walker and

other senior executives beginning in September 1999, that these undisclosed payments were secured

only by the unvested stock options held by defendant Walker, and that Walker intended to and di d


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continue to make these periodic "draws" from the corporate treasury The material omissions

rendered numerous statements in each registration statement and prospectus materially false and

misleading, including statements relating to use of proceeds, executive compensation, employment

contracts, related-party transactions, and the representation that defendant Walker was restricted

from selling his holdings of Network Commerce stock These materially false and misleading

statements constituted a violation of Sections 11, 12(a)(2), and 15 of the Securities Act.

15. These transactions were material to plaintiffs because (x) they reflected that the

Company and its management were focusing their attention primarily on the welfare of defendant

Walker and not that of the Company or its stockholders ; (il) they reflected a propensity of the

Company and its management to engage in non-arms'-length transactions with related parties on

terms unfavorable to the Company; (iii) they reflected a propensity of the Company and its

management to not disclose relevant information in a fair and timely manner, and (iv) they

demonstrated a lack of confidence of the CEO in the value of his stock options and contingent

compensation and thereby lack of confidence in the long-term prospects of the Company itself .

16 In addition, in violation of Sections 11, 12(a)(2), and 15 of the Securities Act, the

Registration Statement/Proxy/Prospectus filed in connection with the Ubarter Merger failed to

disclose that Ubarter was acquired based on inaccurate financial projections and that Ubarter

required significant capital investments to operate effectively .

Proxy Violations

17 During the Class Period, defendants Network Commerce and Walker als o

disseminated to the investing public and its shareholders a materially false and misleading proxy

statement The proxy statement filed during the Class Period failed to disclose the issuance of so-

called loans to defendant Walker and failed to disclose the fact that these undisclosed payments were

secured only by the unvested stock options held by defendant Walker. These material omissions

also rendered numerous statements in the proxy statement materially false and misleading, includin g


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1 statements relating to employment contracts and related -party transactions These materially false

2 and misleading statements constituted a violation of the Section 14(a) of the Exchange Act These

3 omissions were material for reasons analogous to those given in paragraph 15, abov e

4 s

5 18 The Company ' s common stock currently trades on the OTC bulletin board On

6 November 9, 2001, its shares closed at $0 1 2

7 JURISDICTION AND VENUE

9 19 Plaintiffs bring this action pursuant to Sections 10(b), 14 (a) and 20 of the Exchange

9 Act and Rules 10b-5, 17 C F R § 240 10b-5, and 14a-9, 17 C F R § 240 14a-9 that the SEC

10 promulgated thereunder , and Sections 11, 12(a)(2), and 15 of the Securities Act

11 20 This Court has jurisdiction in this action pursuant to Section 27 of the Exchange Act,

12 15 U S C § 78aa, Section 22(a) of the Securities Act, 15 U S C § 77v (a), and 28 U S C § 133 1

13 21 Venue is proper in this District pursuant to Section 27 of the Exchange Act, Section

14 22 of the Securities Act, and 28 U S C §§ 1391(b) and (c) The Company 's corporate headquarters

15 are located in this district Thus, many of the acts giving rise to the violations complained of herein,

16 including the dissemination of mate rially false and misleading information, emanated from, occurred

17 in, and had substantial effects in this distric t

18 22 In connection with the acts, transactions and conduct alleged herein, defendants used

19 the means and instrumentalities of interstate commerce, including the United States malls , interstate

20 telephone communications , and the facilities of national securities exchanges and market s

21 PARTIES

22 Plaintiffs

23 23 Plaintiff Jan Sherman, a resident of Califo rn ia, acquired shares of the Company's

24 common stock during the Class Period on the open market and was injured thereb y

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•24. Plaintiff James Michaelson, a resident of Illinois , acquired shares of the Company' s

common stock in connection with the Company's IPO on or about September 28, 1999 and als o

during the Class Period on the open market and was injured thereb y

25 . Plaintiff Jason Elkin, a resident of Georgia, acquired shares of the Company' s

common stock in connection with the Company's SPO on or about February 16, 2000 and als o

during the Class Period on the open market and was injured thereby.

26. Plaintiffs William Jo and Paul Lum, both residents of British Columbia, acquired

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shares of the Company' s common stock in connection with the acquisition of Inte rnet Domain

Registrars Corporation by Network Commerce on or about December 22, 2000 and were injured

thereby

27. Plaintiff William Wiegand, a resident of Connecticut, acquired shares of the

Company's common stock during the Class Period on the open market and was rjured thereby .

28 Plaintiff Steve Levy, a resident of Illinois, acquired shares of the Company's commo n

stock during the Class Period on the open market and was injured thereby .

29 The foregoing plaintiffs were appointed Lead Plaintiffs by order of this Court . Lead

Plaintiffs acquired Network Commerce common stock during the Class Period, as set forth in their

certifications accompanying the Declaration of Scott A Kamber in Support of the Motion of the

Network Commerce Shareholder Group for Appointment of Lead Plaintiff and Approval of

Proposed Lead Plaintiffs' Selection of Lead Counsel, filed on July 13, 2001, and have suffered

substantial damages as a result of the wrongful acts of defendants a alleged herei n

Network Commerce Defendant s

30 Defendant Network Commerce is a Washington corporation with its principal

executive offices at 411 First Avenue South, Suite 200 North, Seattle, Washington During the Class

Period, the Company described itself as a global technology infrastructure and services company,

providing services such as domain registration, Internet hosting, commerce, business, marketing ,


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wireless technology , and Internet marketplaces . The Company maintains a website at

I www.networkeommerce.com where it disseminates investor information including annual and

quarterly reports filed with the SEC and earnings releases. During the Class Period, Network

Commerce's common stock traded on the NASDAQ before being delisted on or about August 28 ,

2001 . As of April 6, 2001, there were 78,253,578 shares of the Company's common stock issued

and outstanding

31 Defendant Dwayne M Walker ("Walker") has been Chairman of the Board of the

Company since March 1996, Chief Executive Officer of the Company since August 1996, and a

director since August 1995. Walker was also President of the Company from March 1996 t o

January 2000 . As of December 31, 1999, Walker beneficially owned 2,660,465 shares or 6 09

percent of Network Commerce's outstanding shares During the Class period, Walker sold over

900,000 shares of his total holdings at artificially inflated prices As of December 31, 2001, Walker

beneficially owned 201,003 shares of or 3 .0 percent of Network Commerce's outstanding shares .

Because of Walker's position with the Company, he had access to adverse non-public informatio n

about its business, finances, products, markets, and present and future business prospects . Walker

acted to conceal and misrepresent such material information, while selling his own Company stock,

in violation of his duties and responsibilities under federal securities laws

32. Defendants Network Commerce and Walker are sometimes referred to herein as th e

f "Network Commerce Defendants "

33 Walker signed each registration statement, prospectus for the IPO, SPO and Ubarte r

Merger , proxy statement, annual report on Form 10-K, and quarterly report on Form 10-Q of the

Company during the Class Period and was quoted frequently in press releases issued during the

Class Period . Defendant Walker, because of his position of control and authority, was able to an d

did control the content of the various SEC filings, press releases, and other public statement s

pertaining to the Company during the Class Period .


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1 34 Walker had a duty, because of the positions he held, to disseminate complete,

2 accurate, and truthful information regarding the Company's business and operations . He

3 participated in the drafting, preparation, and/or approval of the various public reports and other

4 communications of the Company complained of herein . Accordingly, Walker is responsible for the

5 accuracy of the public reports and releases detailed herein and is liable for the representations

6 contained herein

7 35. Because of his position, ability to exercise power and influence with respect to the

8 Company's course of conduct, and access to material inside information about the Company, Walker

9 was, at the time of the wrongs alleged herein, a controlling person of the Company within the

10 meaning of Section 20(a) of the Exchange Act and Section 15 of the Securities Act

11 IPO Underwriter Defendants

12 36. Defendant U S. Bancorp Piper Jaffray ("Piper Jaffray") is a brokerage and investment

13 banking firm with its principal offices located at U .S. Bancorp Center, 800 Nicollet Mall, Suite 800,

14 Minneapolis, MN 55402 Piper Jaffray was a lead and/or managing underwriter, and substantially

15 participated in the wrongs alleged herein, of the Network Commerce Initial Public Offering on or

16 about September 29, 1999 Piper Jaffray was also a co-manager for the Secondary Public Offering

17 on or about February 16, 2000. Piper Jaffray received substantial fees in connection with the IPO

18 and SPO.

19 37. Defendant Dain Rauscher Inc . ("Dain Rauscher") is a brokerage and investment

20 banking firm with its principal offices located at 60 South Sixth Street, Minneapolis, Minnesota

21 55402. Dain Rauscher was a lead and/or managing underwriter, and substantially participated in the

22 wrongs alleged herein, of the Network Commerce Initial Public Offering on or about September 29,

23 1999. Dain Rauscher received substantial fees in connection with the IPO .

24 38 Defendant SoundView Technology Group, Inc ("SoundView"), successor in interest

25 to both SoundView Technology Group and Wit Capital Corp, is an investment banking firm with its

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principal offices located at 826 Broadway, New York, NY 10003 SoundView was a co-managing

underwriter, and substantially participated in the wrongs alleged herein, of the Network Commerce

Initial Public Offering on or about September 29, 1999 . SoundView received substantial fees in

connection with the IPO

39. Defendants Piper Jaffray, Darn Rauscher, and SoundView are collectively referred to

herem as the "IPO Underwriter Defendants ."

40. Defendants Walker, Network Commerce, and the IPO Underwriter Defendants are

sometimes referred to herein as the "IPO Defendants "

SPO Underwriter Defendants

41 . Defendant J P. Morgan Chase & Co ("JP Morgan"), formerly J.P Morgan & Co, is a

brokerage and investment banking firm with its principal offices located at 270 Park Avenue, New

York, New York 10017 JP Morgan was a lead managing underwriter, and substantially participated

in the wrongs alleged herein, of the Network Commerce Secondary Public Offering on or about

February 16, 2000 JP Morgan received substantial fees in connection with the SP O

42 Defendant CIBC World Markets ("CIBC") is a brokerage and investment banking

firm with its principal offices located at 270 Park Avenue, New York, New York 10017 . CIBC was

a co-managing underwriter, and substantially participated in the wrongs alleged herein, of the

Network Commerce Secondary Public Offering on or about February 16, 2000 . CIBC received

substantial fees in connection with the SPO .

43. Defendant UBS PaineWebber ("PaineWebber"), successor in interest to

PaineWebber, Inc ., is a brokerage and investment banking firm with its principal offices located at

1285 Avenue of the Americas, New York, New York 10019 PaineWebber was a co-managing

underwriter, and substantially participated in the wrongs alleged herein, of the Network Commerce

Secondary Public Offering on or about February 16, 2000 . PaineWebber received substantial fees in

connection with the SPO

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44. Defendants Piper Jaffray, JP Morgan, CIBC, and PaineWebber are collectivel y

referred to herein as the "SPO Underwriter Defendants ."

45 Defendants Walker, Network Commerce, and the SPO Underwriter Defendants ar e

sometimes referred to herein as the "SFO Defendants "

46. The IPO Underwriter Defendants and SPO Underwriter Defendants each owed to the

I purchasers of the Company's stock, including plaintiffs, the duty to make a reasonable and diligent

investigation of the statements contained in the IPO and SPO registration statements and

prospectuses . This duty included ensuring that the statements contained therein were true, and that

there were no omissions of material fact the inclusion of which was required in order to make th e

statements contained therein not misleading . As alleged herein, each Defendant violated those

specific duties and obligations and knowingly, or with reckless disregard, issued and caused to be

issued materially false and misleading statements concerning the Company's initial public offering

and secondary public offering

47. The IPO Underwriter Defendants and SPO Underwriter Defendants each had a dut y

promptly to disseminate accurate and truthful information with respect to Network Commerce's

initial public offering and secondary public offering or to cause and direct that such information be

disseminated and promptly to correct any previously disseminated information that was incorrect or

materially misleading . Defendants' failure to do so caused the price of Network Commerce

common stock to be artificially inflated .

CLASS ACTION ALLEGATION S

48. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

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

or otherwise acquired the Company's common stock between September 28, 1999 and April 16,

2001, inclusive (the "Class") . Excluded from the Class are defendants, members of the immediat e

family of defendant Walker, any entity in which any defendant has or had a controll ing interest, and


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t •the officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors and

assigns of any defendant

49. This action is properly maintainable as a class action because :

(a) during the Class Period there were more than 59 million shares of Network

Commerce stock outstanding . The members of the Class for whose benefit this action is brought are

dispersed throughout the United States and are so numerous that joinder of all class members is

impracticable . Thousands of Network Commerce shares were traded publicly during the Class

Period . Plaintiffs believe that there are hundreds, if not thousands, of Class members ;

(b) plaintiffs' claims are typical of the claims of the members of the Class and

plaintiffs and all members of the Class sustained damages as a result of defendants' wrongful

conduct complained of herein ,

(c) plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class action litigation Plaintiffs have

no interests antagonistic to, or in conflict with, the Class that plaintiffs seek to represent,

(d) a class action is superior to other available methods for the fair and efficient

adjudication of the claims asserted herein because, inter alga, joinder of all members is

impracticable . Furthermore, because the damages suffered by individual members of the Class may

be relatively small, the expense and burden of individual litigation make it virtually impossible for

many Class members to redress the wrongs done to them The likelihood of individual class

members prosecuting separate claims is remote;

(e) plaintiffs anticipate no unusual difficulties in the management of this action as

a class action; and

(f) the questions of law and fact common to the members of the Class

predominate over any questions affecting individual members of the Clas s


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• •50 Common questions of law and fact exist as to all members of the class and

predominate over any questions affecting solely individual members of the Class Among the

questions of law and fact common to the Class with respect to violations of Sections 10(b) and 20 of

the Exchange Act are the following-

(a) whether the federal securities laws were violated by the defendants' act s

and/or omissions as alleged herein ,

(b) whether the Company's public reports and filings issued during the Class

Period misrepresented and/or omitted material facts about Network Commerce's financial condition,

including, but not limited to, the integration of acquisitions, revenue, growth and compliance with

debt covenants ;

(c) whether the Company issued materially false and misleading registration

statements ;

(d) whether the Company issued materially false and misleading prospectuses ,

I and

(e) whether defendants acted with knowledge or with reckless disregard for the

I truth in misrepresenting and/or omitting material facts ;

(f) whether, during the Class Period, the market price of Network Commerce

common stock was inflated artificially as a result of the defendants' wrongful conduct ;

(g) whether defendants participated in and pursued the common course of conduct

complained of herein; and

(h) what the proper measure is of Class members ' damages.

51 Common questions of law and fact exist as to all members of the class and

predominate over any questions affecting solely individual members of the Class . Among the

questions of law and fact common to the Class with respect to violations of Sections 11, 12(a)(2),

and 15 of the Securities Act are the following .


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(a) whether the federal securities laws were violated by defendants' acts and/or

omissions as alleged herein ;

(b) whether the Company issued materially false and misleading registration

II statements,

(c) whether the Company issued materially false and misleading prospectuses;

and

(d) what the proper measure is of Class members ' damages

52 Common questions of law and fact exist as to all members of the class and

predominate over any questions affecting solely individual members of the Class . Among the

questions of law and fact common to the Class with respect to violations of Section 14(a) of the

Exchange Act are the following

(a) whether the federal securities laws were violated by defendants' acts and/or

omissions as alleged herein;

(b) whether the Network Commerce Defendants caused the Company to issue a

materially false and misleading proxy statement ,

(c) whether the Network Commerce Defendants acted negligently in issuing false

and misleading statements contained in the Proxy Statement ,

(d) what the proper measure is of Class members' damages .

NO STATUTORY SAFE HARBOR

53 . The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint . The

statements alleged to be materially false and misleading herein all relate to then-existing facts an d

conditions . In addition, to the extent certain of the statements alleged to be false may be I

characterized as forward looking, they were not identified as "forward-looking statements" when

made, there was no statement made with respect to any of those representations forming the basis of


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this Complaint that actual results "could differ materially from those projected," and 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 . Alternatively, to the

extent that the statutory safe harbor is intended to apply to any forward-looking statements pleaded

herein, defendants are liable for those false forward-looking statements because at the time each of

those forward-looking statements was made, the particular speaker had actual knowledge that the

particular forward-looking statement was materially false or misleading, and/or the forward-looking

statement was authorized and/or approved by an executive officer of Network Commerce who knew

that those statements were false when made .

SUBSTANTIVE ALLEGATIONS COMMON TONON-PROXY VIOLATIONS OF THE EXCHANGE ACT

Defendant Walker's Illegal Windfall

54 During the Class Period, the Network Commerce Defendants fraudulently convince d

the market that ShopNow was successful, when it was not, in three ways (i) by causing the

Company to report fraudulently inflated numbers of merchants, subscribers, and visitors to

ShopNow, (li) by causing the Company to reported misleadingly inflated revenue, and (iii) by

causing the Company misleadingly to show apparent revenue growth by rapidly acquiring

companies that it had no intention of integrating or continuing to operate . The Company was

thereby able to continue to pay large and undisclosed sums to Walker in the form of so-called loans

and maintain artificially inflated stock prices so that Walker could reap millions of dollars in related-

party transactions and insider profits at the expense of the investing publi c

55 As further described in the remainder of this complaint, Walker reaped approximately

$4 5 million in "loans" that the Company forgave and another approximately $2 .4 million from

insider sales based on artificially inflated prices A chart list ing each transaction can be found at

paragraph 230, belo w


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The Compan -

Statements Regarding Numbers of Merchants , Subscribers, And Visitors

56. Network Commerce first began as TechWave in 1994, claiming to offer customers

and merchants on-line a "full suite of e-commerce solutions " In response to the market's rich

valuations of business-to-consumer (B2C") dot .com companies, on April 27, 1999 the Company

announced in a press release that TechWave had changed its name to ShopNow based on the

purported popularity of its shopping portal, "a collection of over 1 million pre-stocked storefronts

that pay store owners a percentage of all sales ."

57. The Company failed to disclose that the merchant , subscriber, and visitor numbers

they reported with respect to ShopNow's website were misleadingly inflated, or their significance

was exaggerated, through several practices in which the Company engaged A number of the

Network Commerce Defendants' statements in this regard are quoted immediately below, beginning

at paragraph 58 . The reasons that these statements were fraudulent is described thereafter, beginning

at paragraph 7 4

58 In a November 11, 1999 press release, the Company caused ShopNow to announc e

the acquisition of SpeedyClick Corp {"SpeedyClhck") for approximately $47 million in ShopNo w

stock and $3 million in cash . The press release further stated :

SpeedyClick members gain access to ShopNow.com's 40,000 merchants, 28shopping categories, millions of products and services and business-to-business e-Commerce services. The community elements of SpeedyClick arealso being integrated throughout the ShopNow Network . During October1999, the SpeedyClick Web site had well over 3 million visitors, with 7 3%reach of women on the Internet according to PC Data Online, and has justreached the 1 million registered users mark. Upon completion of theacquisition, the ShopNow Network will currently have over 6 million visitorsper month making it potentially one of the top five Internet destinationsamong women shoppers .

59 In the same press release, defendant Walker commented on the acquisition as follows :

We believe that the combination of our 40,000 plus merchants andSpeedyClhck's loyal community of women will immediately boost the succes s


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it of the ShopNow Network Linking community with e-Commerce is a natura l

integration and will immediately increase the transactions on the ShopNow2 Network

3 60. On November 17, 1999, the Network Commerce Defendants caused ShopNow to

4 announce the following in a press release-

5 ShopNow coin Inc (Nasdaq: SPNW), a leader in business-to-business and6 business-to-consumer e-Commerce services, today announced that

ShopNow.com will attract over 5 million visits during the month of7 November, far exceeding the more than 3 million visits in October . The new

5 million online monthly shopper figure does not include visits from8 SpeedyClick.com, a recent ShopNow.com acquisition

9 The ShopNow.com merchant base has also increased to over 40,000 onlinebusinesses and merchants up from approximately 30,000 merchants in

10 October. The more than 30% growth in online businesses, merchants and11 advertisers on the ShopNow Network continues ShopNow.com's growth as a

leading shopping destination

12"We are clearly seeing explosive growth on the ShopNow Network from

13 businesses, merchants and advertisers who recognize the value of connectingwith our millions of shoppers," said Dwayne Walker, Chairman and CEO of

14 ShopNow coin.

15 61 One week later, on November 22, 1999, the Network Commerce Defendants caused

16 ShopNow to announce the following in a press release .

17 Sho p Now.com Inc. (N asdaq: SPNW), a leader in business-to-business and18 business-to-consumer e-commerce services, today announced the ShopNow

Network was the third fastest growing site on the Internet for the week endin g19 November 14 according to Media Metrix, which tracks Internet audience

traffic and advertising Additionally, PC Data recognized ShopNow coin as20 the 10th most popular shopping site on the Web .

21 According to Media Metrix, ShopNow coin was up 125.9 percent to 137 daily22 unique visitors. Unique visitors are defined as new visitors to a Web site,

regardless of how many times that person returns . ShopNow.com ranke d23 ahead of leading retailers Buy.com and EToys.com, who placed fourth and

fifth respectively24

The ShopNow Network offers visitors 2825 shopping categories, over 40,000 merchants, millions of products and26 services, and a host of business-to-business e-commerce service s


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• •62 The following week, on November 30, 1999, the Network Commerce Defendants

caused ShopNow to announce the following in a press release :

ShopNow.com Inc (Nasdaq: SPNW), a leading business-to-business andbusiness-to-consumer e-commerce company, today announced it had over sixmillion visitors to the ShopNow Network for the month of November . Thisfigure far exceeds the revised projected number of five million shoppers forthe month The ShopNow Network . offers visitors 28 shopping categories,over 40,000 merchants, millions of products and services, and a host ofbusiness-to-business e-Commerce solutions

63 Approximately two weeks later, on December 15, 1999, defendants caused ShopNo w

to announce the following in a press release :

ShopNow.com Inc. (Nasdaq SPNW), a leading business-to-busmess andbusiness-to-consumer e-commerce enabling company, today announced thatover 6000 new businesses and merchants have joined the ShopNow Networkin the past 90 days, including Sears, PetsMart coin, Tavolo coin andBluefly coin. These merchant additions follow a string of growthannouncements from ShopNow-com as online businesses rush for premiervisibility and exposure during the holiday season and new yearShopNow.com now derives over 80% of its revenues from businesses andmerchants

64 In the same press release, defendant Walker commented on the announcement ,

stating, "ShopNow continues to experience strong interest from businesses and merchants who want

to increase their online sales."

65 . Defendants wasted no time in the New Year in its efforts to fool the market with it s

inflated numbers On January 4, 2000, the Network Commerce Defendants caused ShopNow to

announce the following in a press release:

ShopNow coin Inc. (NASDAQ SPNW), a leading e-commerce enablingcompany for business-to-business and business-to-consumer e-commerce,today announced over 1,100 affiliate and syndication partners have joined theShopNow Syndication Program in the last 30 days . These additions,combined with the more than thousand partners ShopNow coin securedthrough the recent acquisition of bottomdollar .com, reflects the rapid growthof ShopNow corn's e-commerce enabling infrastructure .


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66 In the same press release , defendant Walker commented on the announcement ,

stating , "This rapid growth in the ShopNow Network is an endorsement of our reach in providing e-

commerce services and infrastructure to businesses and Web sites throughout the Internet . "

67 On January 18, 2000, the Network Commerce Defendants caused ShopNow to

announce in a press release the launch of b2bNow com, which the Network Commerce Defendant s

described as a "global business-to-business portal . "

68 On January 20, 2000, the Network Commerce Defendants caused ShopNow to

announce in a press release financial results for the quarter and fiscal year ended December 31 ,

1999 The press release stated with regard to visitors to and merchants of ShopNow

In the fourth quarter of 1999, the ShopNow Network had over 21 millionvisits, up from 7 million visits in the third quarter of 1999 The ShopNowNetwork's page views more than doubled in the fourth quarter to 48 million,compared to 18 million in the third quarter of 1999 By the end of 1999, theShopNow Network had more than 47,000 merchants and over 2,500syndicated/affiliate sites that were connected to the ShopNow NetworkAdditionally, according to PC Data rankings, the ShopNow Network wasranked the 36th most popular property on the Internet for the fourth quarter of1999, compared to the 186th most popular property for the prior quarter

69. On February 29, 2000, the Network Commerce Defendants caused ShopNow to

announce the following in a press release .

ShopNow.com Inc (NASDAQ : SPNW), a leading e-commerce enablingcompany, today announced the ShopNow Network saw strong growth in thefirst two months of the first quarter, exceeding 20 million visitors during themonth of January alone . Visitor totals to the ShopNow Network have alreadysurpassed numbers for the entire fourth quarter of 1999, and the companyexpects to exceed its first quarter target of 25 million visitors by early MarchThe ShopNow Network is an extensive network of commerce-enabledInternet sites which brings together buyers and sellers worldwide .

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1 •70. In the same press release, defendant Walker commented on the announcement as

follows.

The ShopNow Network is emerging as a preferred online commerce networkfor growing numbers of merchants, businesses and consumers . Weanticipate this growth to continue as buyers and sellers experience the benefitsof the ShopNow Network .

71 On March 15, 2000, the Network Commerce Defendants caused ShopNow to

announce the following in a press release :

ShopNow.com Inc (NASDAQ. SPNW), a leading e-commerce enablingcompany, today announced that the b2bnow corn Network the company'sglobal business-to-business portal , added 40,000 new business customerssince the site launched on January 18, 2000 .

72 In the same press release, defendant Walker commented on the announcement ,

stating , "In less than two months over 40,000 new businesses have joined the b2bnow com Network,

validating the need for an easy and efficient avenue for companies to conduct business with eac h

other on the Internet."

73 . In an April 25, 2000 press release announcing ShopNow 's financial results for the

quarter ending March 31, 2000, the Network Commerce Defendants caused ShopNow to state the

following with regard to the number of visitors to and customers of ShopNow

In the first quarter of 2000, visits to ShopNow.com's networks increased158% to over 55 4 million, from 21 .5 million visits in the fourth quarter of1999. This includes over 950,000 visits to b2bNow.com, the primarycomponent of the Business Commerce Network, launched in January Theaverage number of leads and orders per day over the ShopNow Networkincreased to 135,000 per day, from an average of 124,000 per day in thefourth quarter of 1999.

The Statements Regarding Numbers ofMerchants, Subscribers, and Visitors Were Fraudulen t

74 Throughout the Class Period, the Company heralded its success to the public through

its merchant, subscriber, and visitor numbers. Defendants knowingly or with reckless disregard


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reported these metrics in amounts calculated to mislead the public and indicate that ShopNow wa s

more successful than it really was in order to mislead the investing publi c

75. Throughout the Class Period, the Network Commerce Defendants used the inflate d

I numbers of merchants, subscribers, and visitors to the ShopNow website as an indicator of th e

Company's revenue growth Defendants failed to disclose that the vast majority of merchants of the

Company used only the free products and services offered by ShopNow and did not engage in an y

revenue generating transactions at al l

76 For example, the Network Commerce Defendants used the acquisition o f

SpeedyClick to generate large numbers of "hit" counts of ShopNow visitors, which the Company

misleadingly used to portray its growth and success but in actuality had little to do with growth or

success SpeedyClick was a gaming site Visitors played games and were awarded "Speedybucks"

redeemable on the SpeedyClick website ShopNow acquired SpeedyClick to drive Internet traffic to

the ShopNow website.

77. One manner in which traffic was driven to ShopNow was for the Company to place

"clues" to SpeedyClick games on ShopNow merchant sites . SpeedyClick visitors clicked onto the

merchant' s site in search of the clues The SpeedyClick visitors , however, would not make a

purchase from the merchant and instead were only looking for game clues As a result of thi s

practice, the Network Commerce Defendants knowingly or with reckless disregard reported high

amounts of traffic to ShopNow that had no relationship to the Company' s generation of revenue, its

success, or its popularity with consumers or businesses .

78. The number of ShopNow merchants reported by the Network Commerce Defendants

was inflated as well. Defendants routinely included "dead" and/or inactive merchants and double-

counted merchants to inflate its numbers .

79. As a result, ShopNow press releases reporting quarterly financial results during th e

Class Period were materially false and misleading because the Network Commerce Defendants


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knowingly or with reckless disregard failed to disclose that the reported numbers of merchants,

subscribers, and visitors of ShopNow had no correlation to the current or future generation of

revenue at ShopNow.

Statements Regarding Company Revenue

80 During the Class Period, the Network Commerce Defendants inflated the Company's

revenue by (i) prematurely recognizing revenue to meet quarterly revenue targets and consensus

analyst earnings estimates, and (ii) recognizing as current revenue the commitments by partners and

alliances to purchase advertising in the future

81 . According to the Annual Report for fiscal year 1999 filed with the SEC on Form 10-

K on or about February 10, 2000 (the "1999 Form 10-K"), ShopNow derived its revenue primarily in

two ways, stated as follows

We currently derive substantially all of our revenues from merchant servicesand the ShopNow marketplace .

Revenues from merchant services are generated principally throughdevelopment fees, hosting fees and sales and marketing services . Ourmerchant services can be purchased as a complete end-to-end suite of servicesor separately, allowing businesses and merchants to select only those servicesthey desire .

Revenues from the ShopNow marketplace, exclusive of BuySoftware com,are generated primarily from advertising and merchandising fees paid bymerchants, leads and orders delivered to merchants, as well as transactionprocessing and licensing fee s

82 On October 14, 1999, the Network Commerce Defendants caused ShopNow to

announce in a press release the financial results for the quarter ended September 30, 1999 The pres s

release stated, in relevant part ,


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ShopNow.com (Nasdaq SPNW), an electronic commerce company, todayannounced strong third quarter perform ance with revenues for the quarterended September 30, 1999 of $7 .6 million , an increase of 90% compared topro forma revenues of $4 0 million for the quarter ended June 30, 199 9

83 In the same press release, defendant Walker commented on the results, statin g

"We are very pleased with the financial results we reported for our firstquarter as a public company," said Dwayne Walker, president and chiefexecutive officer of ShopNow corn "Total revenues were $7 6 million andour gross margins were 36% for the third quarter of 1999 . ShopNow corn'srecord pro forma revenues during the third quarter of 1999 reflect the strongacceptance of the ShopNow Network as one of the leading c-commercenetworks on the Internet . Our financial results exceeded our internalexpectations "

84 In a December 6, 1999 press release, the Network Commerce Defendants cause d

ShopNow to announce the following.

ShopNow coin Inc (Nasdaq . SPNW), a leading business-to-business andbusiness -to-consumer e-commerce company , today announced that it expectsto exceed analyst revenue expectations for the fourth quarter endingDecember 31, 1999 .

ShopNow coin expects revenues to exceed analyst's projections of $10 5million dollars during the fourth quarter which represents an approximate 40%increase over the third quarter revenues In addition, ShopNow corn expectsto generate in excess of 80% of its revenues from businesses and merchantsduring the fourth quarter

In the month of November 1999 alone, ShopNow.com generated over 1 .5million orders and leads to merchants and businesses on the ShopNowNetwork ShopNow corn generated over 60,000 orders and leads per day onaverage in November In addition, ShopNow.com is currently averaging over6 million shoppers per month on its ShopNow Network .

ShopNow.com is also experiencing very strong growth in the number of newmerchants and businesses joining and using the ShopNow Network InNovember, over 2,000 new businesses and merchants joined the ShopNowNetwork and/or began using the ShopNow Network eBuslness services . Thenumber of businesses and merchants on the ShopNow Network has nowpassed 40,000 .


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• •85. On January 20, 2000, the Network Commerce Defendants caused ShopNow to

announce in a press release the followin g

ShopNow.com Inc., a leading e-commerce enabling company, todayannounced financial results for the quarter and twelve months endedDecember 31, 1999 .

Revenues for the quarter ended December 31, 1999 were $13 4 million, anincrease of 78%, compared to revenues of $7 6 million for the quarter endedSeptember 30, 1999. Gross profit in the fourth quarter of 1999 increased to42%, compared to 36% in the third quarter of 199 9

86 On April 25, 2000, the Network Commerce Defendants caused ShopNow t o

announce the following in a press release-

Total revenue for the first quarter was $18 .7 million, an increase of 39% fromprevious record revenue of $13 .4 million in the fourth quarter of 1999ShopNow.com currently derives revenue from its two core businesses .

ShopNow Network - Revenue from the ShopNow Network, whichconsists of the ShopNow corn marketplace, the BottomDollarNetwork, and various syndicate and affiliate sites, is principallycomprised of fees for advertising and merchandising programs Forthe quarter, revenue from the ShopNow Network increased 39% to$10.6 million from $7.6 million in the fourth quarter of 1999 .

Business Commerce Network and Services -- Revenue from the BusinessCommerce Network consists of revenue from b2bNow .com, includingmerchandising and licensing, and from transaction processing fees forpayments and fraud detection Additional revenue is derived from servicessuch as marketing and e-commerce store design, development, hosting andmaintenance. For the quarter, revenue from the Business Commerce Networkand Services increased 40% to $8 1 million from $5 8 million in the fourthquarter of 1999

The Statements Regarding Revenue Were Fraudulen t

87. During the Class Period, the Network Commerce Defendants engaged in severa l

practices to inflate its reported revenues, rendering the preceding statements in paragraphs 8 0

through 86 fraudulent


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•88 . For example, the Network Commerce Defendants caused ShopNow to prematurel y

record revenue so that it met targets for each quarter This practice was evidenced by monthly sales

reports distributed internally company-wide throughout the Class Period . For each quarter, these

reports showed a significant jump in sales in the third month of the quarter, indicating the advanced

recording of revenue to artificially inflate quarterly revenue figures

89 ShopNow also engaged in agreements and alliances with several technology and

dot corn companies . One such example was Ask Jeeves, Inc . ("Ask Jeeves") . As announced in a

joint press release on April 11, 2000, ShopNow signed an agreement with Ask Jeeves under which

Ask Jeeves would provide certain technology, called the Jeeves Advisor, to ShopNow Defendants

failed to disclose the details of the agreement, including Ask Jeeves's commitment to purchasing

advertising from ShopNow. The Network Commerce Defendants further failed to disclose that the

Jeeves Advisor technology consisted only of one employee who was good at asking questions . The

Company improperly recognized the commitment to buy ads as current revenue The Company

further recorded the Ask Jeeves technology as an asset at an inflated value As a result, the

Company's reported revenue and earnings was artificially inflated .

90 During the Class Period, the Company reached agreements with the following

companies The terms of these agreements were not disclosed to the investing public The

agreements, however, were under terms similar to the Ask Jeeves agreement, allowing the Company

to inflate its reported revenue and earnings by realizing commitments to advertise in the future as

current revenue and by recording the acquired technology as assets at inflated value s

Name of ComnanvBarnesandNoble .comSnowball cornAkamai TechnologiesNet2PhonePrivaseekInktomiRightWorksArmadillo cam

Date of Aireement or Allianc eOct. 6, 1999Dec. 3, 1999Dec 13, 1999Dec. 14, 1999Jan. 5, 2000Jan 6, 2000

Feb 23, 2000Mar. 14, 2000


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Further Fraudulent Statements During Balance of Class Period

91 . At Company management meetings, Walker often described the Company as a car

with no wheels speeding down a hill and described management's task as attempting to put th e

wheels on the car before it crashe d

92 With the popularity of B2C waning, the Network Commerce Defendants announce d

in a press release on May 18, 2000 that ShopNow would be renamed Network Commerce "to better

reflect the company's position as a leading provider of technology, services and commerce networks

for Internet sites ." The Company grouped its hodge-podge of Internet services and technology into

three lines of business . (i) the Network Commerce Distributed Business Network, which included

b2bNow corn, FreeMerchant com, and Ubarter com ; (ii) the Network Commerce Distributed

Consumer Network, which consisted principally of the sites ShopNow com, BottomDollar com, and

SpeedyClick.com, and (iii) the eBusiness Services division, consisting of the Company's consulting,

custom commerce solutions, and integrated marketing services .

93 . As a further spur to the market, the Company announced in the same press releas e

that it would achieve profitability, on a pro forma basis, in the fourth quarter of 2001, "significantl y

earlier than consensus analyst expectations " The press release further stated :

"We have demonstrated the strength of our business model with tremendousrevenue growth and strong gross margins . We are confident we will reachprofitability significantly ahead of schedule by further strengthening revenuegrowth, accelerating margins and lowering expenses as a percentage ofrevenue," said Dwayne Walker, chairman and chief executive officer ofNetwork Commerce Inc. "Our expansive commerce networks and largecustomer base clearly illustrate our position as a leading e-commercetechnology and services company."

94 The foregoing statement that "[w]e have demonstrated the strength of our busines s

model with tremendous revenue growth and strong gross margins" was materially false and


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is 1misleading because the Network Commerce Defendants engaged in conduct that artificially inflated

revenue, as detailed in paragraphs 87 through 90-

95 The statement by defendant Walker that "[w]e are confident we will reac h

profitability significantly ahead of schedule by further strengthening revenue growth, accelerating

margins and lowering expenses as a percentage of revenue" was materially false and misleading

because the Network Commerce Defendants knowingly or with reckless disregard failed to disclose

the conduct used to artificially inflate reported revenue, as detailed in paragraphs 87 through 90 .

96 The statement by defendant Walker that "[o]ur expansive commerce networks an d

large customer base clearly illustrate our position as a leading e-commerce technology and services

company" was materially false and misleading because the Network Commerce Defendants

knowingly or recklessly failed to disclose deceptive conduct, as detailed in paragraphs 74 through

79

97. The day after the foregoing announcement , on May 19, 2000, the Company entered

into a credit agreement with the commercial bank Imperial Bank to borrow $15 million (the "Credit

Agreement") The loan was secured by "substantially" all of the Company's assets . The Credit

Agreement required the Company to maintain certain financial ratios, as explained in further detail

in paragraphs 240 through 246 .

98 A few days later , on May 26, 2000, Walker took another $1,3 97,322 . 66 as a so-called

loan (the "May 2000 Undisclosed Payment") The so-called loan was secured by Walker's unvested

options in Company stock . Walker used the entire loan amount to purchase 771,458 shares of

Network Commerce stock below market value via the exercise of stock options on the same date .

Defendants knowingly or with deliberate recklessness failed to disclose the existence and terms of

the September 1999 and May 2000 Undisclosed Payments in the Company's quarterly results for the

periods ending June 30, 2000 and September 30, 2000, which were thereby materially false and

misleading . This so-called loan was not repaid by Walker and was forgiven by the Company in les s


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than one year. No interest payments on this so -called loan were ever paid by Walker or demande d

by the Company

99 A few days after the May 2000 Undisclosed Payment, defendant Walker gave an

I extensive interview with the publication THE WALL STREET TRANSCRIPT ("TWST"), which was

published on May 31, 2000 During the interview the following exchange took place

TWST : How do you feel about the value the market is currentlyputting on your company ?

Mr. Walker : I believe that our company is definitely undervaluedrelative to the others in the marketplace doing what we do . Our company'sstock is currently undervalued, but ShopNow coin has only been public sinceSeptember 28, 1999 .

TWST : What 's the market missing in terms of your stock price? Whyisn't it being properly valued ?

Mr. Walker: I don't not think the market has put full value on ourB2B division, the growth and size of our e-commerce network, our e-commerce technology infrastructure, or the market penetration the companyhas already achieved . I think that most of the value of the company has beenattributed to the ShopNow marketplace and not so much to the B2B side ofour busines s

100 The foregoing statements by defendant Walker were materially false and misleadin g

for the reasons stated in paragraphs 74 through 79 and 87 through 9 0

101 During the same interview, the following exchange occurred .

TWST- For investors keeping an eye on the company , what can theyuse as benchmarks of milestones to see if you're on track over the next 18months9

Mr Walker : Strong financial performance, continued strong revenuegrowth, and continued strong gross margins are basic benchmarks . . We'veindicated that we think our gross margin should be 42% or higher throughout2000. In the third quarter our margins were 36%, and m the fourth quarterthey reached 42%. Another indicator is the growth and size of our networksbecause they reflect the extent to which we magnetize those networks . Thefact that we've grown from 10,000 merchants to 50,0000 merchants in 1 2


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1 months or the fact that we have 500,000 businesses on our b2bNow Networ kand we're growing between 5,000 and 20,000 new businesses per month, are

2 indicators of future success. The size of our network is another indicator ofour future success . Then the final question is how we magnetize the base of

3 merchants and businesses across our networks That is reflected in financial4 performance.

5 TWST: What's the factor there that will drive it up to the level youwant?

6Mr Walker For ShopNow com, three factors have been driving our

7 gross margins . One is the rapid growth of our business-to-business division,which has very high gross margins, usually 50% and greater That divisio n

8 continues to be the fastest growing element of our business, and drives the9 gross margin of the company . The second is the continued strength of the

ShopNow Network, which has gross margins of 30% or better .

10 102 The preceding statements by defendant Walker were materially false and misleading

11 for the reasons stated in paragraphs 74 through 79 and 87 through 90

12 103 On June 1, 2000 - less than a week after the May 2000 Undisclosed Payment and on

13 the same day that the Company announced completion of the merger with Ubarter - Walker took

14 from the Company's coffers yet another $1,983,223 58 as a so-called loan (the "June 2000

15 Undisclosed Payment") The June 2000 Undisclosed Payment was secured by Company stock

16 pledged by Walker pursuant to a Stock Pledge Agreement Defendants knowingly or with deliberate

17 recklessness failed to disclose the existence and terms of the September 1999, May 2000, and June

18 2000 Undisclosed Payments in the Company's quarterly results for the periods ending June 30, 2000

19 and September 30, 2000, which were thereby materially false and misleading The June 2000

20 Undisclosed Payment was not repaid by Walker and was forgiven by the Company in less than one

21 year. No interest payments on this so-called loan were ever paid by Walker or demanded by the

22Company .

23 104 On June 20, 2000, the Network Commerce Defendants announced in a press release

24 that the Company had experienced "significant growth " The press release stated, in relevant part

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Network Commerce Inc (Nasdaq NWKC), a leading provider of technologyinfrastructure, services and networks for businesses, merchants, Internet sites,and wireless networks co ducting commerce online, today announced thatboth the Network Comzne ce Business Network and the Network CommerceConsumer Network have experienced significant growth in the second quarterof 2000

For the Network Commer~e Business Network, over 100,000 businesses andmerchants are now utilizing the Network Commerce platform

• Over 80,000 1 usmesses and merchants are utilizingFreeMerchant corn build-your-own-store technology .

• Over 20,000 custoipiers are using Network Commerce transactionprocessing technology

• Over 10,000 businesses are now members of Ubarter.com

For the Network Commerce' Consumer Network :

• In June 2000, over 2 ,000 registered users have been added per day

• The network now 1as over 1,400 licensed sites and over 23,000affiliated sites , an i crease of approximately 10,000 since the firstquarter of 200 0

• The three major coriponents of the Network Commerce ConsumerNetwork - ShopNovr .com, SpeedyClick . com and BottomDollar.com- experienced a combined 8.8 million unique visits the week endedJune 17, 2000 accord ing to PC Data Online

105 . The foregoing statements wre materially false and misleading for the reasons stated

in paragraphs 74 through 79 .

106. On July 24, 2000, the Comp6ny announced in a press release the financial results for

the second quarter of fiscal year 2000 . The press release stated, in relevant part

Network Commerce Inc., al leading provider of technology infrastructure,services and networks for bisinesses, merchants, Internet sites, and wirelessnetworks conducting commetrce online, today announced financial results forits second quarter ended Jun 30, 2000

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Total revenue for the second quarter was $26 9 million, an increase of 44%from revenue of $18 .7 million in the first quarter of 2000 and 101% fromrevenue of $13 4 million in the fourth quarter of 1999 . Network Commercederives revenue from the Network Commerce Business Network, whichincludes Enterprise eBuslness Services, and from the Network CommerceConsumer Network

On May 18, 2000, Network Commerce announced that it expects to achieveprofitability, on a pro forma basis consistent with current reporting, in thefourth quarter of 2001, significantly earlier than consensus analystexpectations .

As of June 30, 2000, Network Commerce's balance sheet had over $84 9million in cash, cash equivalents and short-term investments NetworkCommerce has sufficient resources to support operations beyond its targetedprofitability date of the fourth quarter of 200 1

107 The foregoing statements were materially false and misleading when made becaus e

the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that

the Company was our of compliance with material covenants of its Credit Agreement, was in default

and subject to the acceleration of all amounts due, and therefore the Network Commerce Defendants

had no good faith basis to state that "Network Commerce has sufficient resources to support

operations beyond its targeted profitability date of the fourth quarter of 2001 . "

108. The preceding statements in paragraph 108 were further materially false and

misleading for the same reasons stated in paragraphs 87 through 9 0

109 The July 24, 2000 press release further stated:

By delivering strong financial results and continuing the execution of our corestrategy, we exceeded both Wall Street's and our internal goals during thesecond quarter," commented Dwayne Walker, chairman and chief executiveofficer of Network Commerce Inc . "We unveiled our strategy to extend e-commerce to the wireless platform and completed two key acquisitions . Wealso updated our goal of achieving profitability to the fourth quarter of 2001,earlier than previous expectations . This profitability update was made


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possible as a result of our growing customer base, rising revenue, dramatically

increasing gross margins and continued efficient management of expenses

2110. The foregoing statements by Walker were materially false and misleading when made

3for the same reasons stated in paragraph 87 through 90 .

4111 On August 14, 2000, the Company filed with the SEC its quarterly report on form 10-

5Q for the quarter ended June 30, 2000 (the "2000 Second Quarter 10-Q") The 2000 Second Quarter

610-Q contained the same materially false and misleading statements as in the July 24, 2000 press

7release

S112. On August 16, 2000, the Network Commerce Defendants caused the Company to

9announce in a press release that the Consumer Network division of Network Commerce would break

10even in the fourth quarter of 2000 and reach profitability in the first quarter of 2001 . The press

I1release further stated-

12Revenue from Network Commerce's Consumer Network is comprised of fees

13 from licensing, online direct marketing programs and advertising . In thesecond quarter of 2000, the Network Commerce Consumer Networ k

1~ generated $15 .7 million in revenue, or 58% of Network Commerce's total15 revenue for the quarter, a 48% increase from $10.6 million in the first quarter

of 2000. Network Commerce also generates revenue from the Network16 Commerce Business Network, which includes the company's Enterprise

eBusiness Services17

"With the overall growth of the Network Commerce Consumer Network --11 including over 2,000 Internet sites licensing our commerce technology and the19 number of registered users growing by 30,000 a day - we are confident the

Consumer Network alone will generate over $20 million in revenue in the20 fourth quarter of 2000," said Dwayne Walker, chairman and chief executive

officer of Network Commerce. "We have continued to build on and execute21 our business model in our efforts to increase shareholder return, and we are22 confident that our business will continue to grow throughout the rest of 2000

and into 2001 . We also expect our international and wireless initiatives to ad d23 to our revenue stream for both our consumer and business commerce

networks ."24

113 . The foregoing statements were knowingly or with deliberate recklessness materially

25 false and misleading when made for the reasons stated in paragraphs 87 through 9 026


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1 114 In August, 180 days had elapsed since the Company's SPO Defendant Walker was

2 free of restrictions and lock-up agreements on his Network Commerce stock and could now sell it on

3 the open market . Defendant Walker immediately registered to sell 500,000 shares of Network

4 Commerce stock in August 2000 . In the month of August alone, Walker sold 350,000 shares of

5 Network Commerce stock, netting proceeds of nearly $2 million He did not use one penny to repay

6 the substantial "loans" of September 1999, May 2000, or June 2000 .

7 115, On August 24, 2000, the Company announced in a press release the acquisition of

8 Ivebeengood d b a. Uberworks ("UberWorks"), a company providing "multi-merchant e-commerce

9 purchasing tools and umversal shopping cart technology to Internet sites" and streamlined

10 purchasing capabilities Network Commerce acquired UberWorks for approximately $22 .8 million,

11 which included $14 5 million in Network Commerce stock, $5 9 million in assumed debt, and $2 4

12 million in non-cash deferred compensation . The August 24, 2000 press release stated in relevant

13 part .

14 Network Commerce expects to integrate the technology across both theNetwork Commerce Network and the Network Commerce Business Network

15 in the third and fourth quarters of 2000.

16 116 The preceding statements were materially false and misleading because the Network

17 Commerce Defendants knowingly or with deliberate recklessness failed to disclose that

18 The Company received two due diligence reports, each of which recommended

19 against the acquisition of Uberworks ; and

20 Contrary to the Company's stated intentions, UberWorks' technology was

21 incompatible with the Company' s existing technology and was incapable of being integrated with

22 Network Commerce.

23 117. In the August 24, 2000 press release, Walker made the following statement

24 concerning the acquisitio n

25 We fully expect this acquisition to contribute to our overall growth and to help26 us continue to move our Consumer Network towards break-even in the fourth



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1 •quarter of 2000, and to profitability in the first quarter of 2001, ahead ofinternal schedule s

118. The foregoing statement by Walker was materially false and misleading when made

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because the Network Commerce Defendants knowingly or with deliberate recklessness failed to

disclose that (a) the Company received two due diligence reports, each of which recommended

against the acquisition of Uberworks, and (b) Walker had no good faith or reasonable basis to state

that Network Commerce's Consumer Network would achieve break-even in the fourth quarter of

2000 and profitability in the first quarter of 2001, (c) UberWorks' technology was incompatible with

the Company's existing technology; and (d) the UberWorks acquisition was incapable of being

integrated with Network Commerce .

119 In order to generate market interest to finance profits from future insider sales, o n

September 11, 2000 the Network Commerce Defendants caused the Company to announce in a pres s

release that Network Commerce would exceed analyst expectations in the third quarter of 2000 . The

press release stated :

Network Commerce Inc , a leading provider of technology infrastructure,services and networks for businesses, merchants, Internet sites, and wirelessnetworks conducting commerce online, today announced the company expectsto exceed consensus analyst expectations for financial results for the thirdquarter ending September 30, 200 0

Network Commerce expects to generate over $30 million in revenue for thequarter The company also expects gross margins to continue to exceed 50percent for the third quarter, and for the pro forma loss per share to be betterin the third quarter than in previous quarter and to be better than consensusanalyst expectations for this quarter The company plans to report itscomplete third quarter financial results on Monday, October 23, 2000 .

120 The foregoing statements were materially false and misleading when made because

the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose tha t

the Company was out of compliance with material covenants of its Credit Agreement and was in

default and subject to acceleration of all amounts due .


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t !121 . The preceding statements in paragraph I23 were further materially false and

misleading for the reasons stated in paragraphs 87 through 90 .

122. The September 11, 2000 press release further state d

"We have had a very good quarter to date and are confident we will exceedconsensus analyst expectations for financial results for the third quarter," saidDwayne Walker, chairman and chief executive officer of Network Commerce ."We expect this to be the fourth straight quarter we will exceed expectationsWe are very comfortable with analyst projections for our business and arecontinuing to concentrate on delivering results for our shareholders . "

123 The preceding statements were materially false and misleading when made because

the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose tha t

the Company was out of compliance with material covenants of its Credit Agreement and therefore

it was in default and subject to acceleration of all amounts due .

124. The preceding statements in paragraph 126 were further materially false and

misleading for the reasons stated in paragraphs 87 through 90 .

125. These false and misleading statements had the desired effect, sending the Company' s

share price up from $5 .94 to $6 34 in heavy trading volume .

126. On the same day as the September 11, 2000 press release, the Network Commerce

Defendants and certain other directors and officers of the Company kicked off a "road show" or

series of meetings with investors and brokers to tout Network Commerce . The table below lists the

locations of these meetings . During all or some of these meetings, the Network Commerce

Defendants repeated the same materially false and imsleading statements as detailed above in

paragraphs 93 through 122

Date

Sep. 11, 2000

Sep. 13, 2000

Sep 14, 2000

Sep 15, 2000

Location

New York, New York

Philadelphia, Pennsylvania

Baltimore, Maryland

Washington, DC


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Sep 26, 2000

Sep. 27, 2000

Sep 27, 2000

Sep. 28, 2000

Oct. 10, 2000

Oct 11, 2000

Nov 11, 2000

Dec 2, 2000

Location

San Diego, California

Los Angeles, California

Palm Springs, California

San Francisco, California

Chicago, Illinois

Minneapolis, Minnesota

Phoenix, Arizona

Santa Clara, California

127 On September 19, 2000 - in the midst of the "road show" and mere months after the

$1 .39 million May 2000 Undisclosed Payment, the $1 98 million June 2000 Undisclosed Payment ,

I and the $2 million August 2000 insider sale - Walker took yet another $556,140 .16 from the

Company as a so-called loan (the "September 2000 Undisclosed Payment") The "loan" was

secured by Walker's unvested options in Company stock . Walker used most of the loan proceeds to

acquire 125,000 shares of Company stock far below market value via the exercise of options on the

same date This so-called loan was not repaid by Walker and was forgiven by the Company withi n

seven months . No interest payments on this so -called loan were ever made by Walker or demanded

by the Company. Defendants knowingly or with deliberate recklessness failed to disclose the

existence and terms of the September 1999, May 2000, June 2000, and September 2000 Undisclosed

Payments in the Company's quarterly results for the period ending September 30, 2000 filed with th e

SEC on Form 10-Q (the "2000 Third Quarter 10-Q"), which was thereby rendered materially fals e

and misleading .

128. In the fall of 2000, Network Commerce was in further violation of material lo an

covenants of its Credit Agreement and therefore was in default and subject to acceleration of al l

amounts due As a result , the Network Commerce Defendants raised an additional $20 million fo r

the Company through a private placement from one institutional investor, Capital Venture s


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•International, pursuant to a Securities Purchase Agreement dated September 28, 2000 In order to

maintain the Company's shares at artificially inflated prices, the Network Commerce Defendants

misled the investing public regarding the need for the additional funds in a press release dated

October 2, 2000 The press release stated, in relevant part .

Network Commerce Inc., a leading provider of technology infrastructure,enabling services and networks for businesses, merchants, Internet sites, andwireless networks conducting commerce online, today announced thecompany has completed a private placement of $20 million with oneinstitutional investor

The funds raised through the private placement will increase NetworkCommerce's working capital and bolster its balance sheet, adding to thecompany's already strong financial position as it moves toward profitabilityNetwork Commerce expects to become profitable, on a pro forma basisconsistent with current reporting, in the fourth quarter of 2001 .

129 The preceding statements were materially false and misleading when made because

the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that,

because the Company was not in compliance with material covenants of its bank Credit Agreement,

it was in default and subject to the acceleration of all amounts due and therefore the Network

Commerce Defendants had no good faith basis to state that "Network Commerce expects to become

profitable, on a pro forma basis consistent with current reporting, in the fourth quarter of 2001 ."

130 On October 6, 2000, after Walker had siphoned millions of dollars from th e

Company's treasury in the preceding few months, the Network Commerce Defendants caused th e

Company to announce in a press release its first staffreductions. The press release stated :

Network Commerce Inc., a leading provider of technology infrastructure,enabling service and networks for businesses, merchants, Internet sites, andwireless networks conducting commerce online, today announced it hasreduced its work force by 68 people as it moves toward its goal of achievingcompany-wide profitability in the fourth quarter of 2001 and profitability ofits Consumer Network in the first quarter of 200 1


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• fWe have reported very strong financial results over the last several quarters

and we continue to be excited about our financial outlook for the remainder of2000, 2001 and beyond As the company continues to grow and evolve, wecontinue to become more efficient in our business operations and even morefocused on increasing revenues, improving gross margins, lowering ourexpenses and driving aggressively towards profitability," said DwayneWalker, chairman and chief executive officer of Network Commerc e

131 . The preceding statements were knowingly or recklessly materi ally false and

misleading when made because the Network Commerce Defendants knowingly or with deliberate

recklessness failed to disclose that because the Company was not in compliance with material

covenants of its bank Credit Agreement, it was in default and subject to acceleration of all amounts

due, and therefore the Network Commerce Defendants lacked any reasonable basis to announce

"company-wide profitability in the fourth quarter of 2001 and profitability of its Consumer Network

in the first quarter of 2001 ."

132 The preceding statements in paragraph 130 were materially false and misleading fo r

the reasons stated in paragraphs 87 through 90 .

133 Defendants further signaled in the press release that it would meet analyst' s

expectations for "the fourth quarter and beyond . "

134 The preceding statement was materially false and misleading for the reasons stated i n

paragraph 131 and furthermore because :

(a) Network Commerce misleadingly met analysts' expectations by inflating

revenue through the conduct described in paragraphs 87 through 90; and

(b) the Company was not in compli ance with material covenants of its Credit

Agreement and therefore was in default and subject to acceleration of all amounts due.

135 On October 23, 2000, the Network Commerce Defendants caused the Company t o

announce in a press release its financial results for the quarter ended September 30, 2000 . The press

release stated, in relevant part


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0- 161 Total revenue for the third quarter was $33 .4 million, an increase of 24% from

revenue of $26.9 million in the second quarter of 2000, and an increase of2 over 340% from revenue of $7.6 million in the third quarter of 1999 Network

Commerce derives revenue from the Network Commerce Business Network,3 including eBusiness Services, and the Network Commerce Consumer4 Network. CPM based advertising revenue was approximately 3% of total

revenue in the third quarte r

5"For the fourth consecutive quarter, we have exceeded consensus analyst

6 expectations for financial performance," said Dwayne Walker, chairman andchief executive officer of Network Commerce "Our increase in revenue and

7 continuing loss reduction is indicative of the strength of our business and our8 ability to execute the business model. This performance provides a

foundation for the Consumer Network to reach profitability in the first quarte r9 of 2001 and the company to reach overall profitability in the fourth quarter

2001 on a pro forma basis ."

10 As of September 30, 2000, Network Commerce had over $87 .1 million in11 cash, cash equivalents and short-term investments as compared to $84.912 million in the second quarter of 2000 . Network Commerce has sufficient

resources to support operations beyond its targeted profitability date of the13 fourth quarter of 2001

14 136 The preceding statements were materially false and misleading when made because

15 the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that :

16 (a) Network Commerce "exceeded consensus analyst expectations" by inflating

17 revenue through the conduct describe in paragraphs 87 through 90 ; and

18 (b) the Company was not in compliance with material covenants of its bank credit

19 agreement and therefore was in default and subject to acceleration of all amounts due ; and thus the

20 Company lacked the financial resources "to reach profitability in the first quarter of 2001 and the

21 company to reach overall profitability in the fourth quarter 2001 on a pro forma basis ."

22 137. A few days later, on October 25, 2000, in a seemingly unquenchable thirst for funds

23 from the corporate treasury, Walker took yet another $250,000 as a so-called loan (the "October

24 2000 Undisclosed Payment"), amounting to over $4 million in such payments since May 2000 alone .

25 The "loan" was secured by Walker's unvested options in Company stoc k

26


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46 01 138. Having completed the "road show" and successfully convinced the investing public

2 that the Company was able to continue operations until it reached profitability, on November 16,

3 2000, with undisclosed regularity Walker took another $100,000 from the Company as a so-called

4 loan (the "November 2000 Undisclosed Payment") . The November 2000 Undisclosed Payment was

5 secured by Walker's "unvested options to purchase common stock of [Network Commerce] held by

6 [Walker] . "

7 139. On November 21, 2000, the Network Commerce Defendants caused the Company to

8 announce in a press release that it had been ranked one of the fastest growing technology companies

9 in the United States In the press release, defendant Walker commented as follows :

10 Being named the fastest growing technology companies in the nation is a great11 honor for us . . said Dwayne Walker, chairman and chief executive officer of

Network Commerce

12 140. The preceding statement was materially false and misleading for the same reasons

13 stated in paragraphs 87 through 90 .

14 141. Between November 20, 2000 and November 22, 2000, Walker sold 134,326 shares of

15 Company stock, reaping proceeds of $260,51 4

16 142. On December 8, 2000, the Network Commerce Defendants announced in a press

17 release the abrupt resignation of Network Commerce's Chief Financial Officer, Alan D . Koslow .

18 On the same day, in an attempt to soften the market's reaction to this surprise, the Company issued a

19 separate press release, announcing that the Company would achieve profitability by the third quarter

20 of 2001, one full quarter ahead of the Company's previous representation on this subject The press

21 release stated:

22 Network Commerce Inc, the global technology infrastructure and services23 company, today announced it expects to reach profitability, on a pro forma

basis consistent with current reporting, in less than ten months, ahead of24 schedule

25 The company expects continued strong business growth, a reduction in26 operating costs and a reduction in work force to result in an approximate $40

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million cost savings in 2001 . Network Commerce also expects the NetworkCommerce Consumer Network, which currently represents more than 70percent of the company's revenue, to reach profitability as expected in Q12001 .

143 . The preceding statements were materially false and misleading when made becaus e

the Network Commerce Defendants knowingly or with deliberate recklessness failed to disclose that

the Company was not in compliance with material covenants of its bank Credit Agreement, was in

default and subject to acceleration of all amounts due, and therefore the Network Commerce

Defendants lacked any good faith basis to state that the Company "expects to reach profitability, on

a pro forma basis consistent with current reporting, in less than ten months "

144 The December 8, 2000 press release further stated .

"Continued strong growth, decreased expenses and the efficient restructuringof the company are three keys for us to reach profitability earlier thanpreviously expected," said Dwayne Walker, chairman and chief executiveofficer of Network Commerce "As the company continues to grow andevolve, we will continue to evaluate efficiencies in our business operations aswe accelerate toward our goal of profitability . "

145 The foregoing statements were materially false and misleading for the reasons state d

in paragraph 14 3

The Truth Begins To Emerge

146. On January 23 , 2001, the Network Commerce Defendants caused the Company t o

announce the following :

Network Commerce Inc., the global technology infrastructure and servicescompany, today offered revised revenue and net loss guidance for the fourthquarter 2000 and fiscal year 200 1

In addition, the company announced workforce reductions and other cost-cutting measures In response to softness in consumer shopping, the companyplans to shut down its consumer shopping network known as ShopNow coinduring the first quarter of 200 1

Network Commerce will continue to aggressively expand its TechnologyInfrastructure and Services business The company expects the TechnologyInfrastructure and Services business, which includes domain registratio n




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S 01 services, hosting services, commerce services, email marketing services and

business services to expand to more than 40% of revenues for 2001 The2 company also generates revenue through its Portal Group, consisting of online

sites and portals As a result the company expects a gross margin of more3 than 70% for 2001

4 Network Commerce currently expects that its higher gross margins for 2001,5 coupled with significant cost reductions, will keep the company on target to

reach pro forma profitability in the third quarter of 2001, and cash flow6 profitability by the fourth quarter of 2001 .

7 147 The Company announced further in the press release that it would reduce its

8 workforce by approximately 145 people and that its United Kingdom sales office, opened only five

9 months earlier, would be closed

10 148. The preceding statements in paragraph 146 were materially false and misleading

11 because the Network Commerce Defendants knowingly or with deliberate recklessness failed to

12 disclose that the Company was not in compliance with material covenants of its Credit Agreement

13 and that it was in default and subject to acceleration of all amounts du e

14 149 The news shocked the market and sent Network Commerce's stock plummeting 42

15 percent on January 23, 2001 from $1 31 per share to $0 75 per share before trading of the

16 Company's stock was halted by NASDAQ The Company's stock finally closed at $0 947 per share,

17 down nearly 30 percent

18 150 Defendants further shocked the market in its earnings release for the fourth quarter

19 and year end for 2000. The January 29, 2001 press release stated, in relevant part.

20 During the fourth quarter 2000, Network Commerce incurred $16 8 million inrestructuring charges stemming primarily from the closing of certain business

21 units. In addition, the company recognized a $124 .5 million impairment22 charge in the fourth quarter 2000 relating to certain acquired intangible asset s

and goodwill from business acquisitions, cost-basis investments and23 marketable equity securities.

24

25 As of December 31, 2000, Network Commerce had $49 9 million in cash,26 cash equivalents and short-term investments, compared to $87 1 million in th e

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1 third quarter of 2000. The company expects to have approximately $12

million to $14 million in cash, cash equivalents and short-term investments as2 of June 30, 2001, and to have approximately $8 million to $10 million in cash,

cash equivalents and short-term investments as of December 31, 2001, th e3 same quarter in which the company expects to be cash flow positive The4 company currently expects to be profitable, on a pro forma basis consistent

with current reporting, in the third quarter 200 1

5 151 As of December 31, 2000, Network Commerce was out of compliance with working

6 capital covenants under its bank credit agreement The lender has waived the company's obligation

7 to comply with those financial covenants for the period ended December 31, 2000, but has re-

8 instituted existing working capital covenants going forward . The company is now in the process of

9 renegotiating certain provisions of the agreement . The violation of debt covenants and the historical

10 results of operations have led auditors to inform the company that they expect to issue a going

11 concern opinion in the company's annual report if facts and circumstances do not change .

12 152 The foregoing statement that "[t]he company currently expects to be profitable, on a

13 pro forma basis consistent with current reporting, in the third quarter 2001" was materially false and

14 misleading when made for the reasons stated in paragraphs 87 through 90 and 14 8

15 153. The news sent the Company's stock reeling from $0 .8125 per share on January 29,

16 2001 to close at $0 6875 per share on January 31, 2001 The stock price represented a 97 percent

17 drop from the Class Period high of $23 4375 per share .

18 154 On February 9, 2001, Walker sold 425,000 shares of Company stock, reaping

19 proceeds of $190,675 As of February 9, 2001, Walker still held 1,833,802 shares of Company

20 stock .

21The Truth Is Revealed

22 155. On April 2, 2001 the Company filed a notification of late filing of its 2000 annual

23 report on form NT 10-K (the "Notification") . The Notification stated:

24As a result of the following, the Company is not currently able to complete its

25 Annual Report on Form 10-K without unreasonable effort .

26

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The Company currently is conducting a detailed analysis of events subsequentto December 31, 2000 The Company requires additional time to complete itsanalysis of the subsequent events and their potential impact on the value ofcertain intangible asset s

Also, the Company anticipates finalizing material modifications to its presentcredit facility These modifications may materially affect the information tobe provided in the Form 10-K.

156 On April 17, 2001, the Company filed with the SEC its annual report for the fiscal

year ended December 31, 2000 on form 10-K (the "2000 10-K") The 2000 10-K stated, in relevan t

part

We believe that our cash reserves and cash flows from operations will beadequate to fund our operations through the first quarter of 2001 . Ifadditional financing is not available to us we may need to dramatically changeour business plan, sell or merge our business, or face bankruptcy .

Our independent accountants have issued a "going concern" opinion is theirreport to our financial statements for the year ended December 31, 2000,citing recurring operating losses, reduced working capital and violation ofdebt covenants

157. In the 2000 10-K, the Company further disclosed that it had been notified of a default

by one of its creditors The 2000 10-K stated :

On April 3, 2001, the Company received a notice of default from the holdersof the $20 million of convertible notes for an alleged violation of certainprovisions of the convertible notes relating to the breach of certain negativefinancial covenants contained in the credit agreement for $15 .0 million with acommercial bank and the breach by the Company of certain material terms ofthe Securities Purchase Agreement dated as of September 28, 2000 Thenotice of default demanded that the Company redeem the convertible notes onor before April 9, 2001 for an amount equal to $17.25 million, which amountrepresents 115% of the aggregate principal amount of the remainingconvertible notes . The Company responded to the notice of default on April4, 2001 and denied that an event of default occurred If the Company were tobe in default of the convertible notes and if the default is not cured, or waivedby the holder of the convertible notes, and the Company is required to redeemthe amounts outstanding under the convertible notes, the holder could seek


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remedies against the Company . . In addition, the Company may have noalternative but to file a petition in bankruptcy .

158 . The 2000 10-K also disclosed the transactions engaged in by Walker in raiding the

corporate treasury of approximately $4 5 million in so -called loans between September 28, 1999 and

November 16, 2000 and that the Company was essentially forgiving the "debt" or giving the mone y

to Walker. The 2000 10-K stated-

In April 2001, the Company settled potential claims held by Mr DwayneWalker, the Company's Chairman and Chief Executive Officer, against theCompany arising from the withdrawal of Mr. Walker's shares of theCompany's common stock from the Company's secondary public offeringcompleted in February 2000 The terms of the settlement are set forth in aletter agreement dated as of April 5, 2001 between the Company and Mr .Walker .

The settlement provides that the Company will purchase 262,000 shares of itscommon stock from Mr Walker in exchange for the tender of a $3 8 millionnote payable from the Company (Company Note) . In connection with thesettlement, the Company agreed to consolidate all of Mr . Walker'soutstanding promissory notes to the Company, executed by him sinceSeptember 28, 1999, which totaled $4 .5 million as of December 31, 2000 andwere recorded in Notes Receivables from employees and Subscriptionsreceivable . Principal and interest, at 7% per year, are due on March 31, 2011Following the Company's purchase of the 262,000 shares, Mr Walker mayendorse the Company Note to the Company in partial satisfaction of the newloan. In addition, Mr Walker agreed to transfer up to 1,171,158 shares ofCompany stock to the Company as additional payment of the loan . TheCompany agreed to reduce the balance of the loan by the fair market value ofthe 1,171,158 shares on the date of the transfer . To the extent Mr Walker'soutstanding promissory note has not been completely repaid by the aboveactions, the Company will immediately extinguish any remaining obligationMr. Walker may owe under the promissory note . As a result of the settlement,the Company will recognize approximately $4 .5 million dollar expense in thefirst quarter of 2001 .

159. The market reacted with surprise and horror to the news, sending the stock price o f

the Company down nearly 20 percent from $0 .156 to close at $0 125 on April 18, 2001 .


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1 SUBSTANTIVE ALLEGATIONS COMMON TOVIOLATIONS OF THE SECURITIES ACT

2Materially False And Misleading Statements

3 in Connection with the Initial Public Offering

4 160 On June 21, 1999, the IPO Defendants announced the proposed initial public offering

5 of ShopNow.com (the "IPO" )

6 161 On June 18, 1999, in connection with the IPO, the Company filed with the SEC a

7 Registration Statement on Form S-1 with the SEC. The Company filed several amendments to the

8 Registration Statements on Forms S-1/A dated July 30, 1999, August 25, 1999, August 31, 1999,

9 September 9, 1999, September 22, 1999, and September 28, 1999, whereupon it was declared

10 effective by the SEC (the "IPO Registration Statement" )

11 162 The IPO Registration Statement was materially false and misleading because it

12 omitted all facts relating to a so-called loan of $223,313 60 to Walker evidenced by a promissory

13 note dated September 28, 1999 (the "September 1999 Undisclosed Payment") . Pursuant to the

14 September 1999 Undisclosed Payment, Walker would forfeit unvested options if he failed to repay

15 the Company pursuant to the terms of the note .

16 163 This so-called loan was not repaid by Walker when it came due in September 2000,

17 or at any other time No amendment to the terms of the note was ever disclosed Walker was never

18 forced to forfeit any rights for failure to repay the so-called loan.

19 164. The IPO Registration Statement, including the September 28, 1999 amendment,

20 stated on page 20 in a section titled "Use of Proceeds "

21 The principal purposes of the offering are to obtain capital to repayindebtedness and for working capital and general corporate purposes, establish

22 a public market for our common stock and facilitate future access to public23 markets. We intend to use the net proceeds from this offering as follows :

24

25 The remainder of these net proceeds, or approximately $65 5 million, will beused for working capital and general corporate purposes . We do not currently

26



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1 have a specific plan for the use of these proceeds The amounts that weactually expend for working capital will vary significantly depending on a

2 number of factors, including future revenue growth, if any, and the amount ofcash we generate from operations As a result, we will retain broad discretion

3 in allocating the net proceeds of this offering .

4 165. The preceding statements were materially false and misleading because the IPO

5 Defendants failed to disclose that proceeds from the IPO would be used to pay Walker compensation

6 of $223,313 60 in exchange for a promissory note to the Company executed by Walker on

7 September 28, 1999, the effective date of the IPO Registration Statement The note was secured

8 only by Walker's unvested options in Company stock . The IPO Defendants failed to disclose the

9 existence and terms of this so-called loan . The IPO Defendants failed to disclose the existence and

10 terms of this contemplated means of undisclosed executive compensation . The IPO Defendants'

11 disclosure of "Use of Proceeds" was therefore materially false and misleadin g

12 166. The IPO Registration Statement, including the September 28, 1999 amendment,

13 stated on page 62 in a section titled "Executive Contracts, Termination of Employment and Change-

14 In-Control Arrangements"

15 ShopNow has entered into a written employment agreement with Mr . Walker16 effective as of July 1, 1999. This Agreement may be terminated by either Mr .

Walker or ShopNow at any time, upon written notice to the other . The17 agreement provides for an initial annual salary of $400,000 and a yearly bonus

of up to $200,000 based upon the achievement of performance criteria18 specified by the compensation committee Mr . Walker's salary is to be19 reviewed at the end of each calendar year by the compensation committee an d

adjusted at the board's sole discretion, provided, however, that Mr . Walker's20 salary may not be adjusted downward without his consent Pursuant to the

agreement, Mr Walker will receive, as of the date of this offering, an option21 to purchase 500,000 shares of common stock at an exercise price equal to the

initial per share offering price, which option will vest in four equal semi-22 annual installments subject to Mr. Walker's continued employment with23 ShopNow. After the first year of the agreement, ShopNow will grant M r

Walker during each of the next eight quarters an option to purchase up to24 125,000 shares of common stock at an exercise price equal to the closing price

of ShopNow's common stock on the Nasdaq National Market on the date o f25 grant, which option will vest in four equal semi-annual installments subject to

26 Mr. Walker's continued employment with ShopNow .


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167 The preceding statements were false and materially misleading because the IP O

Defendants failed to disclose that Walker would receive compensation in the form of additional so-

called loans that mirrored the September 1999 Undisclosed Payment . Neither the September 1999

Undisclosed Payment nor similar subsequent payments qualified as working capital or served a

general corporate purpose The so-called loans were secured only by Walker's unvested options in

Company stock The Company's disclosure of "Executive Contracts, Termination of Employment

and Change-In-Control Arrangements" was therefore materially false and misleading

168. The IPO Registration Statement, including the September 28, 1999 amendment ,

stated on page 681n a section titled "Related Transactions with Executive Officers, Directors and 5 %

Shareholders"

In June 1999, we granted Mr. Walker . . options to purchase 450,000 . . .shares of common stock . . . at an exercise price equal to the low point of thefiling range as indicated in our preliminary prospectus for this offering, or$10 00 per share These options vest over a two-year period commencingafter the closing of this offering .

We believe that all of these transactions were made on terms as favorable tous as we would have received from unaffiliated third parties

169. The preceding statements were materially false and misleading for the same reason s

stated in paragraph 162 through 163 . This was a related-party transaction that was undertaken on

terms far more favorable than one with an unaffiliated third party.

170 The IPO Registration Statement, including the September 28, 1999 amendment ,

stated, in relevant part, on page 73 in a section titled "Shares Eligible for Future Sale" :

Of the remaining 26,254,706 shares of common stock held by existingshareholders, 26,159,231 shares will be deemed "restricted securities" as thatterm is defined in Rule 144 . All of these restricted securities will be subject tolock-up agreements providing that, with certain limited exceptions, theshareholder will not offer, sell, contract to sell or otherwise dispose of anysecurities of ShopNow that are substantially similar to the common stock,including but not limited to any securities that are convertible into orexchangeable for, or that represent the right to receive, common stock or anysuch substantially similar securities (other than pursuant to employee stock


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1 option plans existing on, or upon the conversion or exchange of convertible o r

exchangeable securities outstanding as of, the date of the lock-up agreement)2 for a period of 180 days after the date of this prospectus without the prior

written consent of Dain Rauscher Wessels, a division of Dam Rausche r3 Incorporated. As a result of these lock-up agreements, notwithstanding4 possible earlier eligibility for sale under the provisions of Rules 144, 144(k)

and 701, none of these shares may be sold until 180 days after the date of this5 prospectus.

6 171 The preceding statements were materially false and misleading for the same reasons

7 stated in paragraph 162 through 163 The contemplated transaction allowed Walker to sell his

8 restricted shares of stock to the Company in contravention of the 180-day restriction on the sale of

9 "restricted securities" held by Walker. The Company's disclosure of "Shares Eligible for Future

10 Sale" was therefore materially false and misleading.

11 172. The foregoing omissions and false and misleading statements were material to

12 plaintiffs because (1) they reflected that the Company and its management were focusing their

13 attention primarily on the welfare of defendant Walker and not that of the Company or its

14 stockholders ; (ii) they reflected a propensity of the Company and its management to engage in non-

15 arms'-length transactions with related parties on terms unfavorable to the Company, (in) they

16 reflected a propensity of the Company and its management to not disclose relevant information in a

17 fair and timely manner, and (iv) they demonstrated a lack of confidence of the CEO in the value of

18 his stock options and contingent compensation and thereby lack of confidence in the long-term

19 prospects of the Company itsel f

20 173. On September 29, 1999, the Company filed a prospectus on Form 424B4 and a

21 prospectus supplement on Form 42483 on October 15, 1999 (collectively, the "IPO Prospectus") In

22 a section titled "Use of Proceeds" on page 21, the IPO Prospectus repeated the same materially false

23 and misleading statements as in the IPO Registration Statement, as detailed in paragraph 16 4

24 174 For the same reasons set forth in paragraph 165, this failure to disclose the payment to

25 Walker in the IPO Prospectus rendered it materially false and misleadin g

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• •175. In a section titled "Executive Contracts, Termination of Employment and Change-In-

Control Arrangements" on page 63, the IPO Prospectus repeated the same materially false and

misleading statements as in the IPO Registration Statement, as detailed in paragraph 16 6

176. For the same reasons set forth in paragraph 167, this failure to disclose the payment t o

Walker in the IPO Prospectus rendered it materially false and misleading .

177. In a section titled "Related Transactions with Executive Officers, Directors and 5 %

Shareholders" on page 67, the IPO Prospectus repeated the same materially false and misleading

statements as in the IPO Registration Statement, as detailed in paragraph 168 .

178 For the same reasons set forth in paragraph 169, this failure to disclose the payment to

Walker in the IPO Prospectus rendered it materially false and misleading .

179. In a section titled "Shares Eligible for Future Sale" on pages 74-75, the IPO

Prospectus repeated the same materially false and misleading statements as in the IPO Registratio n

Statement, as detailed in paragraph 170 .

180 For the same reasons set forth in paragraph 171, this failure to disclose the payment t o

Walker in the IPO Prospectus rendered it materially false and misleadin g

181 The underwriting of the IPO was managed by underwriters Dain Rauscher, Pipe r

3affray, and SoundView According to the IPO Prospectus, the underwriting group (of which the

IPO Underwriter Defendants were members) was to receive a commission of $0.84 per share, or a

total of $6,090,000, based on the spread between the per share proceeds to Network Commerce

($11 .16) and the IPO price to the public ($12 .00 per share). Pursuant to the IPO Prospectus and an

Underwriting Agreement, Network Commerce agreed to sell the underwriters 7,250,000 share s

issued in connection with the Offering, with Dam Rauscher receiving 2,830,500 shares, Piper Jaffray

receiving 1,415,250 shares, and SoundView receiving 2,044,250 . The remaining shares were

offered and sold to the other members of the underwriting group . As a result of the IPO, ShopNow

received $80.9 million in net proceeds


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Materially False and Misleading Registration Statementin Connection with the Secondary Public Offenn a

182 On January 20, 2000, ShopNow filed with the SEC a Registration statement on Form

S-1 for the proposed secondary public offering of 8,500,000 shares of ShopNow common stock (th e

"SPO") The Registration Statement was amended on January 31, 2000 and again on February 10,

2000, whereupon it was declared effective by the SEC (the "SPO Registration Statement")

183 The SPO Registration Statement was materially false and misleading because i t

omitted all facts relating to the September 1999 Undisclosed Payment

184 The SPO Registration Statement, including the February 10, 2000 amendment, state d9

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on page 13 in a section titled "Use of Proceeds "

We estimate that the net proceeds to us from the sale of the 8,550,000 sharesof common stock offered by us will be approximately $134.8 million, at anassumed public offering price of $16 75 per share, and after deducting theunderwriting discounts and commissions and estimated offering expensespayable by us . If the underwriters' over-allotment option is exercised in full,we estimate that our net proceeds from this offering will be $158 6 millionWe will not receive any proceeds from the sale of shares by sellingshareholders .

The principal purposes of this offering are to obtain working capital forgeneral corporate purposes, including expansion of sales and marketingactivities and research and development. We may use a portion of the netproceeds to acquire or invest in complementary businesses, products andtechnologies .

185 The preceding statements were materially false and misleading because the SP O

Defendants failed to disclose that proceeds from the SPO would be used to pay Walker

compensation in the form of additional so-called loans that mirrored the September 1999

Undisclosed Payment Neither the September 1999 Undisclosed Payment nor subsequent payments

qualified as working capital or served a general corporate purpose . The so-called loans were secured

only by Walker's unvested options in Company stock The Company's disclosure of "Use of

Proceeds" was therefore materially false and misleading .


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on page 45 in a section titled "Employment Contracts, Termination of Employment and Change-In-

Control Arrangements "

ShopNow has entered into a written employment agreement with Mr . Walkereffective as of July 1, 1999 This Agreement may be terminated by either MrWalker or ShopNow at any time, upon written notice to the other Theagreement provides for an initial annual salary of $400,000 and a yearly bonusof up to $200,000 based upon the achievement of performance criteriaspecified by the compensation committee. Mr. Walker's salary is to bereviewed at the end of each calendar year by the compensation committee andadjusted at the board's sole discretion, provided, however, that Mr Walker'ssalary may not be adjusted downward without his consent Pursuant to theagreement, Mr Walker will receive, as of the date of this offering, an optionto purchase 500,000 shares of common stock at an exercise price equal to theinitial per share offering price, which option will vest in four equal semi-annual installments subject to Mr . Walker's continued employment withShopNow. After the first year of the agreement, ShopNow will grant MrWalker during each of the next eight quarters an option to purchase up to125,000 shares of common stock at an exercise price equal to the closing priceof ShopNow's common stock on the Nasdaq National Market on the date ofgrant, which option will vest in four equal semi-annual installments subject toMr Walker's continued employment with ShopNo w

187. The preceding statements were materi ally false and misleading because the SPO

Defendants failed to disclose that Walker was paid $223,313 .60 in exchange for a promissory note to

the Company executed by Walker on September 28, 1999 By the terms of the promissory note, it

was secured only by Walker's invested options in Company stock . Defendants failed to disclose the

existence and terms of this promissory note . The Company's disclosure of "Executive Contracts,

Termination of Employment and Change-In-Control Arrangements" was therefore materially false

and misleading

188 The SPO Registration Statement, including the February 10, 2000 amendment, stated23

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on page 49 in a section titled "Related Transactions with Executive Officers, Directors and 5 %

Shareholders" .

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I In June 1999, we granted Mr Walker . options to purchase 450,000shares of common stock . at an exercise pace of $10 00 per share On

2 September 27, 1999, we granted Mr. Walker options to purchase 500,0003 shares of common stock with an exercise price of $12 0 0

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5 We believe that all of these transactions were made on terms as favorable tous as we would have received from unaffiliated third parties .

6 189. The preceding statements were materially false and misleading for the same reasons

7 stated in paragraph 183 This was a related party transaction that was undertaken on terms far more

8 favorable than one with an unaffiliated third party .

9 190. The SPO Registration Statement, including the February 10, 2000 amendment, stated,

10 in relevant part, on pages 56-57 in a section titled "Shares Eligible for Future Sale" :

11Of the remaining 41,568,035 shares of common stock held by existing

12 shareholders, 33,107,310 shares will be deemed restricted securities as thatterm is defined in Rule 144 . Of these restricted securities 14,189,089 ar e

13 subject to lock-up agreements that expire on March 27, 2000 and 10,374,42914 shares are subject to lock-up agreements that expire 90 days after the date of

this prospectus The lock-up agreements provide that, with certain limite d15 exceptions, the shareholder will not offer, sell, contract to sell or otherwise

dispose of any securities of ShopNow that are substantially similar to the16 common stock, including but not limited to any securities that are convertibl e

into or exchangeable for, or that represent the right to receive, common stock17 or any such substantially similar securities (other than pursuant to employee18 stock option plans existing on, or upon the conversion or exchange o f

convertible or exchangeable securities outstanding as of, the date of the lock-19 up agreement) for the periods that expire on March 27, 2000 and 90 days after

the date of this prospectus, respectively without the prior written consent o f20 Damn Rauscher Wessels, the managing underwriter of our initial public21 offering, and J.P. Morgan & Co , respectively .

22The preceding statements were materially false and misleading for the same reasons stated in

23 paragraph 183 . The contemplated transaction allowed Walker to sell his restricted shares of stock to

24the Company in contravention of the 180-day restriction on the sale of "restricted securities" held by

25 Walker. The Company's disclosure of "Shares Eligible for Future Sale" was therefore matenally

26 false and misleading



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•191 The foregoing omissions and false and misleading statements were material to

plaintiffs because (i) they reflected that the Company and its management were focusing their

attention primarily on the welfare of defendant Walker and not that of the Company or its

stockholders; (ii) they reflected a propensity of the Company and its management to engage in non-

arms'-length transactions with related parties on terms unfavorable to the Company ; (iii) they

reflected a propensity of the Company and its management to not disclose relevant information in a

fair and timely manner, and (iv) they demonstrated a lack of confidence of the CEO in the value of

his stock options and contingent compensation and thereby lack of confidence in the long-term

prospects of the Company itself.

192. On February 16, 2000, the Company filed a prospectus on Form 424B1, the "SP O

Prospectus." In a section titled "Use of Proceeds" on page 13, the SPO Prospectus repeated th e

same materially false and misleading statements as in the SPO Registration Statement, as detailed in

paragraph 184 .

193. For the same reasons set forth in paragraph 185, this failure to disclose the Walker

payment in the SPO Prospectus rendered it materially false and misleading .

194. In a section titled "Employment Contracts, Termination of Employment and Change-

In-Control Arrangements" on page 45, the SPO Prospectus repeated the same materially false an d

misleading statements as in the SPO Registration Statement, as detailed in paragraph 18 6

195 . For the same reasons set forth in paragraph 187, this failure to disclose the Walker

payment in the SPO Prospectus rendered it materially false and misleading

196. In a section titled "Related Transactions with Executive Officers, Directors and 5%

Shareholders" on page 49, the SPO Prospectus repeated the same materially false and misleadin g

statements as in the SPO Registration Statement, as detailed in paragraph 188 .

197 . For the same reasons set forth in paragraph 189, this failure to disclose the Walker

payment in the SPO Prospectus rendered it materially false and misleading .


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0 •198. In a section titled "Shares Eligible for Future Sale" on pages 56-57, the SP O

Prospectus repeated the same materially false and misleading statements as in the SPO Registration

Statement, as detailed in paragraph 190 .

199. For the same reasons set forth in paragraph 191, this failure to disclose the Walker

payment in the SPO Prospectus rendered it materially false and misleading

200 The underwriting of the SPO was managed by underwriters JP Morgan, Piper Jaffray ,

CIBC, and PaineWebber . According to the SPO Prospectus, the underwriting group (of which the

SPO Underwriter Defendants were members) was to receive a commission of $0 76 per share, or a

total of $6,090,000, based on the spread between the per share proceeds to Network Commerce

($13 .7387) and the IPO price to the public ($14.50 per share). Pursuant to the IPO Prospectus and

an Underwriting Agreement, Network Commerce agreed to sell the underwriters 8,000,000 shares

issued in connection with the SPO, with JP Morgan receiving 2,816,000 shares, Piper Jaffray

receiving 1,408,000 shares, CIBC receiving 1,408,000 shares, and PaineWebber receiving 1,408,000

shares The remaining shares were offered and sold to the other members of the underwriting group .

201 . As a result of the SPO, ShopNow received proceeds of $108 .7 million .

Materially False and Misleading StatementsIn Connection With The IJbarter Merger

202 On December 21, 1999, the Network Commerce Defendants caused ShopNow t o

announce in a press release the proposed acquisition of Ubarter com (the "Ubarter Merger")

Ubarter was an online forum allowing businesses to buy and sell products and services without the

use of cash Network Commerce intended to generate revenue from Ubarter by charging a five to

ten percent cash fee on every Ubarter transaction .

203. The June 1, 2000 press release, announcing completion of the acquisition, touted th e

proposed Ubarter Merger, statin g

"[T]hrough our existing Network Commerce customer base of over 700,000businesses and merchants, we expect to substantially grow the Ubarter .combarter exchange over the next 12 months," said Dwayne Walker, chairman


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and chief executive officer of Network Commerce Inc "We plan to extendbarter services across our business-to-business properties, increasing revenueby increasing the number of transactions conducted and offering ourcustomers a new way to conduct commerce online "

Network Commerce will receive a five to ten percent cash transaction feeevery time an Ubarter corn member buys or sells an item. Over the last 90days, Ubarter.com members have conducted over $10 million in trading. ForUbarter.com fees collected per member are up 47 percent over the past sixmonths, and the number of items available on the Web site is up 136 percentover the same time period .

The acquisition will further add additional members, inventory andtransactions to the Ubarter com system and will introduce thousands of newbusinesses and merchants to our online trading forum," said Liad Meidar,chief executive officer of Ubarter .com "Not only will our current customershave access to the full range of services offered by Network Commerce, butthis acquisition exponentially increases the number of potential Ubarter compartners "

204 The forgoing statements were materially false and misleading because the Networ k

Commerce Defendants failed to disclose that (i) the forecasts and projections for cash flows from

Ubarter were grossly inaccurate, and (ii) Ubarter required significant capital investments to operate

and attract meaningful revenues, including a change in user interface and a new back-end

management system

205 . On March 14, 2000, ShopNow filed with the SEC a Registration Statement on Form

S-4 in connection with the Ubarter Merger. The Registration Statement/Proxy Statement/Prospectu s

was amended on May 8, 2000, whereupon it was declared effective by the SEC (the "Ubarte r

Registration Statement")

206 The Ubarter Registration Statement was materially false and misleading because it

omitted all facts relating to the September 1999 Undisclosed Payment .

207 That so-called loan was not repaid by Walker when it came due in September 2000 or

at any other time No amendment to the terms of the note was ever disclosed Walker was neve r

forced to forfeit any rights for failure to repay the so-called loan .


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• t208 The Ubarter Registration Statement stated in a section entitled "Risk Factors" on page

SHOPNOW COM MAY NOT BE ABLE TO SUCCESSFULLYINTEGRATE UBARTER COM AND ACHIEVE THE BENEFITSEXPECTED TO RESULT FROM THE MERGER.

The acquisition of Ubarter.com is intended to expand ShopNow corn'scapability to enable businesses to exchange products and services IfShopNow.com is unable to successfully complete the acquisition ofUbarter corn and successfully integrate Ubarter corn's businesses,technologies and personnel, its ability to increase product and serviceofferings will be reduced. This could cause ShopNow .corn to lose business toits competitors, and ShopNow corn's operating results could suffer .

The acquisition of Ubarter corn may involve numerous risks , including

- diverting management's attention from other business concerns ;

- being unable to maintain uniform standards, controls, procedures andpolicies ,

- entering markets in which ShopNow.com has no direct priorexperience ;

- improperly evaluating new services and technologies or otherwisebeing unable to fully exploit the anticipated opportunity ; and

- being unable to successfully integrate the acquired businesses,technologies and other assets

If ShopNow.com inaccurately assessed Ubarter com's businesses ortechnologies, its business could suffer . In addition, this acquisition mayinvolve the assumption of obligations or large one-time write-offs andamortization expenses related to goodwill and other intangible assets. Any ofthe factors listed above would adversely affect ShopNow .com's results ofoperations.

209 The preceding statements were materially false and misleading because the Network

Commerce Defendants failed to disclose that (a) the forecasts and projections for cash flows fro m

Ubarter were grossly inaccurate ; and (b) Ubarter required significant capital investments to operate


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0 is

and attract meaningful revenues, including a change in user interface and a new back-en d

management system

210 The Ubarter Registration Statement stated on page 82 in a section titled "Executive

Compensation" that for fiscal year 1999 defendant Walker earned a salary of $321,923, a bonus o f

$101,566, and received stock options for 950,175 shares

211 . The preceding statements were materially false and misleading because the Networ k

Commerce Defendants failed to disclose that they planned to pay Walker compensation in the form

of additional so-called loans that mirrored the September 1999 Undisclosed Payment . Indeed, the

Company made the May 2000 Undisclosed Payment prior to, and the June 2000 Undisclosed

Payment on the same day as, the Company's announcement that the Ubarter merger was completed,

as described below in paragraph 217 And, the Network Commerce Defendants evidently planned

those payments before they were actually made . Neither the September 1999 Undisclosed Payment

nor subsequent payments qualified as working capital or served a general corporate purpose The

so-called loans were secured only by Walker's unvested options in Company stock The Company's

disclosure of "Executive Compensation" was therefore materially false and misleadin g

212. The Ubarter Registration Statement stated on page 84 in a Section title d

"Employment Contracts, Termination of Employment and Change-in-Control Arrangements"

ShopNow.com has entered into a written employment agreement with MrWalker effective as of July 1, 1999. This agreement may be terminated byeither Mr Walker or ShopNow.com at any time, upon written notice to theother. The agreement provides for an initial annual salary of $400,000 and ayearly bonus of up to $200,000 based on the achievement of performancecriteria specified by the compensation committee . Mr. Walker's salary is tobe reviewed at the end of each calendar year by the compensation committeeand adjusted at the board's sole discretion, provided, however, that MrWalker's salary may not be adjusted downward without his consent. Pursuantto the agreement, Mr . Walker received, as of September 27, 1999, an option topurchase 500,000 shares of common stock at an exercise price equal to$12.00, which option will vest in four equal semiannual installments subjectto Mr Walker's continued employment with ShopNow.com After the firstyear of the agreement, ShopNow.com will grant Mr. Walker during each o f

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1the next eight quarters an option to purchase up to 125,000 shares of commonstock at an exercise price equal to the closing price of ShopNow corn'scommon stock on the Nasdaq National Market on the date of grant, whichoption will vest in four equal semiannual installments subject to Mr . Walker'scontinued employment with ShopNow corn. Mr. Walker receives a $400monthly car allowance and life insurance of $2,000,000 .

213. The preceding statements were materially false and misleading for the reasons state d

in paragraph 211 .

214. The Ubarter Registration Statement stated on page 89 in a section titled "Ce rtain

Shop Now.com Transactions"

In June 1999, ShopNow corn granted Mr. Walker . . options to purchase450,000 . . . shares of common stock . . at $10 00 per share .

ShopNow .com believes that al l these transactions were made on termsfavorable to ShopNow .com as it would have received from unaffiliated thirdpart ies

215 The preceding statements were materially false and misleading for the same reasons

stated in paragraph 21 1

216 The aforementioned omissions and false and misleading statements were material t o

plaintiffs for the reasons stated in paragraph 191 .

217. On June 1, 2000, the Network Commerce Defendants caused the Company to

announce in a press release that the acquisition of Ubarter corn had been completed, Network

Commerce paid $61 .7 million for Ubarter.com, issuing $40 .8 million in common stock, $875,000 in

cash, assuming $978,000 in debt, and canceling $7 6 million in debt between Ubarter .com and th e

Company

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SUBSTANTIVE ALLEGATIONS COMMON TO VIOLATIONSOF SECTION 14(A) OF THE EXCHANGE ACT

Materially False and Misleading Statements inConnection with the April 19, 2000 Proxy Statement

218. On April 19, 2000, the Network Commerce Defendants issued a Proxy Statement

pursuant to Section 14(a) of the Exchange Act (the "Proxy Statement") .

219. The Proxy Statement was materially false and misleading because it omitted all fact s

relating to a so -called loan of $223,313 .60 to Walker evidenced by a promissory note dated

September 28, 1999 (the "September 1999 Undisclosed Payment") .

220 This so-called loan was not repaid by Walker when it came due in September 2000 o r

at any other time. No amendment to the terms of the note was ever disclosed. Walker was never

forced to forfeit any rights for failure to repay the so-called loan .

221 The Proxy Statement stated on page 10 in a section titled "Employment Contracts,

Termination of Employment and Change-in-Control Arrangements"

ShopNow has entered into a written employment agreement with Mr. Walkereffective as of July 1, 1999 This agreement may be terminated by either MrWalker or ShopNow at any time, upon written notice to the other Theagreement provides for an initial annual salary of $400,000 and a yearly bonusof up to $200,000, based upon the achievement of performance criteriaspecified by the compensation committee . Mr. Walker's salary is to bereviewed at the end of each calendar year by the compensation committee andadjusted at the board's sole discretion, provided, however, that Mr . Walker'ssalary may not be adjusted downward without his consent . Pursuant to theagreement, Mr . Walker received, as of September 27, 1999, an option topurchase 500,000 shares of common stock at an exercise price equal to $12 .00per share, which option will vest in four equal semiannual installments subjectto Mr. Walker's continued employment with ShopNow After the first year ofthe agreement, ShopNow will grant Mr. Walker during each of the next eightquarters an option to purchase up to 125,000 shares of common stock at anexercise price equal to the closing price of ShopNow's common stock on theNasdaq National Market on the date of grant, which option will vest in fourequal semiannual installments subject to Mr. Walker's continued employmentwith ShopNow.


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•222. The preceding statements were materially false and misleading because they failed t o

disclose that the Network Commerce Defendants planned to give Walker additional compensation in

the form of so-called loans that mirrored the September 1999 Undisclosed Payment Neither the

September 1999 Undisclosed Payment nor subsequent payments qualified as working capital or

served a general corporate purpose . The so-called loans were secured only by Walker's unvested

options in Company stock .

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223 The Proxy Statement stated on page 15 , in a section titled "Related Transactions with

Executive Officers, Directors and 5% Shareholders "

In June 1999, we granted Mr Walker . options to purchase 450,000 .shares of common stock . . . at an exercise price of $10 00 per share .

On August 11, 1999, we granted . options to purchase to purchase450,000 shares of common stock . . . at an exercise price of $10 .00 per share .

On September 27, 1999, we granted Mr. Walker options to purchase500,000 shares of common stock with an exercise price of $12 0 0

We believe that all these transactions were made on terms as favorableto us as we would have received from unaffiliated third partie s

224. The preceding statements were materially false and misleading because the Network

Commerce Defendants failed to disclose that the Company planned to pay additional Walker

compensation in the form of additional so-called loans that mirrored the September 1999

Undisclosed Payment. Neither the September 1999 Undisclosed Payment nor subsequent payment s

qualified as working capital or served a general corporate purpose . The so-called loans were secured

only by Walker's unvested options in Company stock . This was a related-party transaction that was

undertaken on terms far more favorable than one with an unaffiliated third party The Company's

disclosure of "Related Transactions with Executive Officers, Directors and 5% Shareholder's" was

therefore materially false and misleading .


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225 The aforementioned omissions and false and misleading statements were material to

plaintiffs for the reasons stated in paragraph 19 1

ADDITIONAL SCIENTER ALLEGATIONS

226 As alleged herein, defendants Walker and Network Commerce acted with scienter i n

that they knew or with deliberate recklessness disregarded that the public documents and statements

issued or disseminated in the name of the Company were materially false and misleading, and knew

or with deliberate recklessness disregarded that such statements or documents would be issued or

disseminated to the investing publi c

227 Defendant Walker, by virtue of his personal knowledge, receipt of informatio n

reflecting the true facts regarding the Company, and/or his control over the Company, which made I

him privy to confidential proprietary information, participated in the fraudulent scheme alleged

herein With respect to non-forward-looking statements and/or omissions, the Network Commerce

Defendants knew and/or with deliberate recklessness disregarded the falsity and misleading nature of

the information, which they caused to be disseminated to the investing publi c

228 Defendant Walker had the opportunity to commit and participate in the wrongfu l

conduct complained of herein He is the senior executive officer of Network Commerce and,

accordingly, controlled the information disseminated to the investing public in Network Commerce's

press releases, SEC filings, and communications with analysts Thus, he could falsify and did falsify

the information that reached the public about Network Commerce's financial condition and results

of operation s

229 Defendant Walker engaged in such a scheme and course of conduct to inflate th e

price of Network Commerce common stock in order to, among other things, (i) profit from increases

in the Company's common stock price to obtain stock compensation awards, including insider sale s

at profits, and (ii) to issue more common stock to the investing public as currency for acquisitions

and to secure bank financing


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7__~ -0230. The Network Commerce Defendants' scienter is evidenced also by the numerous

transactions in which Walker engaged to personally profit from their fraud The following chart sets

forth the so-called loans made and the insider sales of Network Commerce stock by Walker during

the Class Period:

WALKER'S UNDISCLOSED AND/OR UNLAWFUL PROFITS

Date Nature o fProfits Shares Sold Price per Share Amount

Reaped

Sep 28, 1999 So-Called Loan $223,313 .60

May 26, 2000 So-Called Loan 1,387,322 66

Jun 1, 2000 So-Called Loan 1,983,223 58

Aug . 3, 2000 Sale 120,000 6 00 720,000 00

Aug . 4, 2000 Sale 10,000 6 00 60,000 00

Aug . 6, 2000 Sale 50,000 5.50 275,000 0 0

Aug 15, 2000 Sale 70,000 5.44 380,800 00

Aug. 21, 2000 Sale 50,000 5.75 287,500.00

Aug. 28, 2000 Sale 50,000 5.25 262,500.00

Sep. 19, 2000 So-Called Loan N/A 556,140.16

Oct 25, 2000 So-Called Loan N/A 250,000 00

Nov 16, 2000 So-Called Loan N/A 100,000.00

Nov. 20, 2000 Sale 35,853 2.46 88,198 0 0

Nov 21, 2000 Sale 3,473 2 38 8,266 00

Nov. 21, 2000 Sale 5,000 2 .25 11,250 00

Nov 22, 2000 Sale 5,000 2 00 10,000 00

Nov. 22, 2000 Sale 85,000 1 .68 142,800.00

Feb 1, 2001 Sale 300,000 0.50 150,000 .00

Feb 7, 2001 Sale 25,000 0.38 9,500 00

Feb 9, 2001 Sale 100,000 031 31,000 00

TOTALS 909,326 $6,936,814.00


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231 . Walker's proceeds during the Class Period from the above-listed activities wer e

$6,936,814, including approximately $4.5 million in " loans" and approximately $2.4 million in

insider sales of 909,326 shares

232 . The foregoing insider transactions are highly unusual because each one was made

either contemporaneously with or within a few days of materially false and misleading statements

made by the Network Commerce Defendants, as detailed above

The Executive Compensation Plan

233 . Defendant Walker beneficially owned substantial amounts of the Company's stock as

detailed above and thus benefited from increases in the Company's stock price. Defendant Walker

was awarded stock options for 950,175 shares for the fiscal year ended December 31, 1999

234. Pursuant to a July 1, 1999 written employment agreement, Walker was awarded stoc k

I options of 125,000 shares during each of the successive eight quarters commencing on July 1, 200 0

235. According to the April 19, 2000 proxy statement filed with the SEC on Schedule

14A, a significant port ion of the Walker 's compensation is equity based and is closely tied to the

economic performance of the Company

The compensation committee views stock options as an important part of ourlong-term, performance-based compensation program . The compensationcommittee bases grants of stock options to our executive officers under ourstock option plan on the committee's estimation of each executive'scontribution to the long-term growth and profitability of [NetworkCommerce]. The stock option plan is intended to provide additionalincentives to the executive officers to maximize shareholder value .

236. Defendant Walker received the following incentive compensation for fiscal year

1999

Name Cash Salary

Walker $321,923

Cash Bonus Options

$101,566 950,175


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237. Thus, Walker was highly motivated to inflate the price of the Company's common

stock because a significant portion of his compensation (both stock and cash) was derived from th e

price of such stock.

238 As detailed in paragraphs 98, 103, 127, 137, 138, 162 and 163, during the Clas s

Period the Network Commerce Defendants granted Walker so-called loans from the Company

treasury totaling $4 5 million . These "loans" were secured by Walker's Company stock or unvested

options for Company stock .

239. Thus, Walker was highly motivated to inflate the price of Network Commerc e

common stock to be able to sell his stock at a profit and to avoid being liable for insufficien t

collateral to cover the so-called loans .

240 Network Commerce funded its day-to-day operations and acquisitions largely through

(1) the issuance of stock in public offerings, (ii) borrowings under a $15 million credit agreement

with a commercial bank entered into on May 19, 2000 (the "Credit Agreement"), and (iii) a $2 0

million private placement with Capital Ventures International ("CVI") in convertible notes pursuant

to a Securities Purchase Agreement executed on September 28, 2000 (the "Securities Agreement") .

241 . Under the Credit Agreement, the Company was required to abide by certain financial

and nonfinancial covenants, including an adjusted quick ratio (de fined as the ratio of Consolidated

Quick Assets to Consolidated Current Liabilities) of 1 .75 to 1 .00, and a certain minimum

consolidated net worth The Credit Agreement also required the Company to prepare its quarterly

and annual financial statements during the Class Period in accordance with GAAP.

242 The Company's performance under the Credit Agreement was secured by

substantially all of the Company 's assets.

243 As of December 31, 2000 the Company had an adjusted quick ratio of 1 .14 to 1 00,

which was out of compliance with the Credit Agreement .


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244 The Company also sold $20 0 million of convertible notes and warrants to CVI. The

notes bad a one-year term. Pursuant to the sale, the Company filed a registration statement on Form

S-3 with the SEC . Upon closing of the Securities Purchase, the Company issued warrants to

purchase 4,050,633 shares of Network Commerce common stock to the private institution at an

exercise price of $10 37 per share. The warrants were immediately exercisable and expire five years

from closing Immediately after the effective date, $5 million of the notes were converted into

common stock .

245 On April 3, 2001, the Company received a notice of default from the holders of the

$20 million of convertible notes for an alleged violation of certain provisions of the convertible

notes relating to the breach of covenants in the Credit Agreement and the breach by the Company of

certain material terms of the Securities Agreement dated September 28, 2000 . The notice of default

demanded that the Company re deem the convertible notes on or before April 9, 2001 for an amount

equal to $17 25 million.

246 Thus, to quench the Company' s dire need for cash, the Network Commerc e

Defendants were highly motivated to inflate the price of Network Commerce stock to obtain the

Credit Agreement and Secondary Public Offering and to complete the private placemen t

FRAUD-ON-THE-MARKET ALLEGATIONS

247 With regard to the al legations arising under Section 10(b) and Rule 1Ob-5, plaintiffs

intend to rely on the fraud-on-the market doctrine, which assumes the existence of an efficient

market for Network Commerce securities . In that connection, brokers nationwide have immediate

access to press releases and trading information about Network Commerce through computer and

news wire systems . These systems display, within minutes of the information release or transaction

taking place, pertinent information and the most recent trades and price s

248. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-

I on-the-market doctrine in that-


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(a) defendants made public misrepresentations and/or failed to disclose facts

during the Class Period ,

(b) the omissions and misrepresentations of fact were material ,

(c) Network Commerce met the requirements for listing and was listed on the

NASDAQ, an open, highly efficient, and automated market ;

(d) as a public company, Network Commerce filed periodic public reports with

the SEC;

(e) Network Commerce's trading volume, during the Class Period, was

substantial, thereby reflecting numerous trades each day ,

(f) the misrepresentations and/or omissions alleged herein would tend to induce a

reasonable investor to misjudge the value of Network Commerce's common stock ;

(g) plaintiffs and the members of the Class purchased their common stock during

the Class Period without knowledge of the omitted or misrepresented facts, an d

(h) Network Commerce was followed by various analysts employed by major

brokerage firms that wrote reports that were distributed to the sales force and certain customers o f

their respective brokerage firms and which were available to the public through various automated

data retrieval services . Thus, each of these reports was publicly available and entered the publi c

marketplace .

249. Based on the foregoing, plaintiffs and the members of the Class are entitled to a

presumption of reliance upon the integrity of the market for their Section 10(b) claims.

COUNT I

(Against Walker and Network Commercefor Violations of Section 10(b) of the Exchange Act

and Rule 10b-5 Promulgated Thereunder)

250. Plaintiffs repeat and re-allege the allegations contained above, as if fully set forth J

herein


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• •251 . This count is asserted against defendants Walker and Network Commerce and i s

based upon Section 10(b) of the Exchange Act, 15 U.S .C § 78j(b), and Rule 10b-5 promulgate d

I thereunder.

252 During the Class Period, defendants Walker and Network Commerce, singly and i n

concert, engaged in a common plan, scheme, and unlawful course of conduct, pursuant to which they

knowingly or with deliberate recklessness engaged in acts, transactions, practices, and courses of

business which operated as a fraud and deceit upon plaintiffs and the other members of the Class,

and made various deceptive and untrue statements of material facts and omitted to state material in

order to make the statements made, in light of the circumstances under which they were made, not

misleading to plaintiffs and the other members of the Class . The purpose and effect of said scheme,

plan, and unlawful course of conduct was, among other things, to induce plaintiffs and the other

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

artificially inflated price s

253 . During the Class Period, defendants Walker and Network Commerce, pursuant t o

said scheme, plan, and unlawful course of conduct, knowingly and recklessly issued, cause to be

issued, participated in the issuance of, the preparation and issuance of deceptive and materially false

and misleading statements to the investing public as particularized above.

254. As a result of the dissemination of the materially false and misleading statements se t

forth above, the market price of the Company's common stock was artificially inflated during the

Class Period. In ignorance of the materially false and misleading nature of the statements described

above and the deceptive and manipulative devices and contrivances employed by said defendants,

plaintiffs and the other members of the Class relied, to their detriment, on the integrity of the market

price of the stock in purchasing the Company's common stock Had plaintiffs and the other

members of the Class known the truth, they would not have purchased said shares or would not have

purchased them at the inflated prices that were paid


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• •255 Plaintiffs and the other members of the Class have suffered substantial damages as a

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

256 By reason of the foregoing, defendants Network Commerce and Walker directl y

violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they- (a)

employed devices, schemes, and artifices to defraud, (b) made untrue statements of material facts or

omitted to state material facts in order to make the statements made, in light of the circumstances

under which they were made, not misleading, or (c) engaged in acts, practices, and a course of

business which operated as a fraud and deceit upon plaintiffs and the other members of the Class in

connection with their purchases or acquisition of the Company's common stock during the Class

Period

COUNT II

(Against Walker for Violations of Section 15 of the Securities Act)

257. Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 52 and

160 through 225 above as though fully set forth herein This count is brought pursuant to Section 1 5

of the Securities Act, 15 U S C § 77o, on behalf of the Class against defendant Walker .

258 Throughout the Class Period, defendant Walker, by reason of has director an d

executive positions and as the owner, directly and/or indirectly, of shares of the Company's common

stock, had the power and authority to cause the Company to engage in the wrongful conduct

complained of herein . As a result, at the time of the wrongs alleged herein, defendant Walker was a

"controlling person" of the Company within the meaning of Section 15 of the Securities Act .

259. Defendant Walker issued, caused to be issued, and participated in the issuance of th e

materially false and misleading statements contained in, or the material facts omitted from, the IPO

Registration Statement, the IPO Prospectus , the SPO Registration Statement, the SPO Prospectus,

the Ubarter Prospectus , Registration Statement , the Proxy Statement and signed the same Pursuant

to Section 15(a) of the Securities Act, by reason of the fo regoing , defendants Walker is liable to the


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12(a)(2) of the Securities Act As a direct and proximate result of said defendant's wrongful conduct

during the Class Period, plaintiffs and the other members of the Class have suffered substantial

damages in connection with their acquisition of Network Commerce common stock

COUNT III

(Against Walker for Violation of Section 20(a) of the Exchange Act)

260. Plaintiffs repeats and real leges the allegations contained above, as if set forth full y

herein

261 . Defendant Walker, by virtue of his position, stock ownership and specific acts

described above, was at the time of the wrongs alleged herein, a controlling person within the

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

262. Defendant Walker had the power and influence and exercised the same to cause th e

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

263 By reason of the conduct alleged in Count I of the Complaint, defendant Walker is

liable for the aforesaid wrongful conduct and is liable to plaintiffs and to the other members of th e

Class for the substantial damages that they suffered in connection with their purchase or acquisition

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

COUNT IV

(Against Network Commerce, Walker , and the IPO Underwriter Defendantsfor Violations of Section 11 of the Securities Act )

264 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 19

through 52, and 160 through 181 above as though fully set forth herein

265 This cause of action is brought by plaintiffs pursuant to Section 11 of the Securities

Act, 15 U S .C § 77k, on behalf of the Class against defendants Network Commerce, Walker, and

the IPO Underwriter Defendants and does not sound in fraud


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1 266 The June 18, 1999 Registration Statement for the Initial Public Offering, as amended

2 on July 30, 1999 , August 25, 1999, August 31, 1999, September 9, 1999, September 22, 1999, and

3 September 28, 1999 (the "IPO Registration Statement ") was inaccurate and misleading , contained

4 untrue statements of material facts, omitted to state other facts necessary to make the statements

5 made not misleading , and concealed and failed adequately to disclose mate rial facts as described

6 above

7 267. Network Commerce is the registrant for the shares sold to plaintiffs and other

8 members of the Class . Network Commerce issued, caused to be issued and part icipated in the

9 issuance of materially false and misleading wri tten statements to the investing public contained in

10 the IPO Registration Statement . As an issuer of the shares, Network Commerce is s trictly liable to

11 plaintiffs and the Class for the material misstatements or omissions .

12 268. Defendant Walker either personally or through an attorney- in-fact signed the IPO

13 Registration Statement and was a director and senior executive of Network Commerce at the time of

14 the IPO

15 269. Each of the IPO Underwriter Defendants was an underwriter of the Network

16 Commerce stock as that term is used in Section 11(a)(5) of the Securities Act

17 270 The defendants named herein were responsible for the contents and dissemination of

18 the IPO Registration Statement. None of the defend ants named herein made a reasonable

19 investigation or possessed reasonable grounds for be lieving that the statements contained in the IPO

20 Registration Statement were true and did not omit any material facts and were not materially

21 misleading

22 271. Plaintiffs and the members of the Class acquired shares of Network Commerce

23 pursuant to, or traceable to, the IPO Registration Statement and did not know of untrue statements or

24 omissions of material facts

25 272 Plaintiffs and the Class have sustained damages

26


CLASS ACTION COMPLAINT - 72 KELLER ROHRBACK L .L.P .1201 THIRD AVENUE , SUITE 3200

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273 . The action is commenced within three years after Network Commerce stock was

bona fide offered to the public and the claims asserted herein were brought by plaintiffs within one

year after plaintiffs discovered or, by the exercise of reasonable diligence , should have discovered

the misrepresentations and omissions alleged herein The price of Network Commerce stock on the

date this action was filed was below the purchase price paid by plaintiffs and members of the Class .

COUNT V

(Against Network Commerce , Walker, and the IPO Underwriter Defendantsfor Violations of Section 12(a)(2) of the Securities Act )

274 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 1 9

through 52, and 160 through 181 above as though fully set forth herein .

275. This count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U S C.

§ 771, on behalf of the Class against Network Commerce, Walker and the IPO Underwriter

Defendants

276. The Company offered and issued a security, namely shares of Network Commerce

common stock, by means of a September 29, 1999 prospectus and October 15, 1999 Prospectu s

Supplement (the "IPO Prospectus") during the Class Period . The IPO Prospectus contained untrue

statements of material facts and omitted to state material facts required to be stated therein or

necessary to make the statements made in the IPO Prospectus not misleading, as set forth above .

277. The offering materials included untrue statements of material fact and omitted to stat e

material facts necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading, as set forth with greater particularity herein The Company's

actions of solicitation included participating in the preparation of the materially false and misleading

IPO Registration Statement and IPO Prospectus

278 The IPO Underwriter Defendants and other broker- dealers acting on their behalf sold

Network Commerce stock to plaintiff and the Class within the meaning of Section 12(a)(2) of th e

Securities Act. They did so by means of the materially false and misleading Registration Statement


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I and Prospectus described above, which included untrue statements of material fact and omitted to

state material facts necessary in order to make the statements made, in light of the circumstance s

under which they were made, not misleading in violation of Section 12(a)(2) of the Securities Act

279. The IPO Underwriter Defendants are "sellers" within the meaning of the Securities

Act because the IPO Underwriter Defendants (a) transferred title to Network Commerce stock to the

members of the Class; (b) transferred title to Network Commerce stock to other underwriters and/or

broker-dealers that sold Network Commerce stock as agents for the IPO Underwriter Defendants ;

and (c) solicited the purchase of Network Commerce stock by the Class, motivated at least in part by

a desire to serve the IPO Underwriter Defendants' own financial interests, including but not limited

to commissions on their own sales of Network Commerce stock and separate commissions on the

sales of Network Commerce stock by non-underwriter broker-dealers.

280. Plaintiffs and the members of the Class did not know of any of the untruthfu l

I statements and omissions alleged and in the exercise of reasonable care could not have known of

them

281 This action is commenced within three years of the initial public offerings and withi n

one year of the time plaintiffs and the other Class member purchasers of the stock discovered or

could have discovered the existence of untrue statements by exercising due diligence .

282. Plaintiffs and the other Class members hereby tender their common stock to th e

defendants and seek rescission of their purchases to the extent that they continue to own suc h

securities .

COUNT VI

(Against Network Commerce, Walker, and the SPO Underwriter Defendantsfor Violations of Section 11 of the Securities Act)




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284. This cause of action is brought by pla intiffs pursuant to Section 11 of the Securities

Act, 15 U S.C § 77k, on behalf of the Class against Network Commerce , Walker, and the SP O

I Underwriter Defendants and does not sound in fraud .

285 The January 20, 2000 Registration Statement, as amended on January 31, 2000 an d

again on February 16, 2000 for the Secondary Public Offering (the "SPO Registration Statement")

was inaccurate and misleading, contained untrue statements of material facts, omitted to state othe r

facts necessary to make the statements made not misleading, and concealed and failed adequately to

disclose material facts as described above

286 Network Commerce is the registrant for the shares sold to plaintiffs and other

members of the Class. Network Commerce issued, caused to be issued and participated in the

issuance of materially false and misleading written statements to the investing public contained in

the SPO Registration Statement As an issuer of the shares, Network Commerce is strictly liable to

plaintiffs and the Class for the material misstatements or omissions

287. Defendant Walker personally signed the SPO Registration Statement and was a

director and senior executive of Network Commerce at the time of the SPO .

288. Each of the SPO Underwriter Defendants was an underwriter of the SPO as that ter m

is used in Section 11(a)(5) of the Securities Act

289. The defendants named herein were responsible for the contents and dissemination of

the SPO Registration Statement. None of the defendants named herein made a reasonabl e

investigation or possessed reasonable grounds for believing that the statements contained in the SP O

Registration Statement were true and did not omit any material facts and were not materially

misleading

290. Plaintiffs and the members of the Class acquired shares of Network Commerce

pursuant to, or traceable to, the SPO Registration Statement and did not know of untrue statement s

or omissions of material facts .


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291 Plaintiffs and the Class have sustained damages

292 The action is commenced within three years after Network Commerce stock wa s

bona fide offered to the public and the claims asserted herein were brought by plaintiffs within on e

I year after plaintiffs discovered or, by the exercise of reasonable diligence , should have discovere d



COUNT VI I

(Against Network Commerce, Walker, and the SPO Underwriter Defendantsfor Violations of Section 12(a)(2) of the Securities Act)



294 This count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C.

§ 771, on behalf of the Class against defendants . Network Commerce, Walker and the SP O

Underwriter Defendants .

295 . The Company offered and issued a security, namely shares of Network Commerce

common stock, by means of a February 16, 2000 prospectus for a Secondary Public Offering (the

"SPO Prospectus") during the Class Period . The SPO Prospectus contained untrue statements o f

material facts and omitted to state material facts required to be stated therein or necessary to mak e

the statements made in the SPO Prospectus not misleading , as set forth above .

296. The offering materials included untrue statements of mate rial fact and omitted to state

material facts necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading, as set forth with greater particularity herein The Company's

actions of solicitation included participating in the preparation of the materially false and misleading

SPO Registration Statement and SPO Prospectus .

297. The SPO Underwriter Defendants and other broker-dealers acting on their behalf sol d

Network Commerce stock to plaintiff and the Class within the meaning of Section 12(a)(2) of th e


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• •Securities Act. They did so by means of the materially false and misleading SPO Registration

Statement and Prospectus described above , which included untrue statements of material fact and

omitted to state material facts necessary in order to make the statements made , in light of the

circumstances under which they were made , not misleading in violation of Section 12(a)(2) of the

Securities Act .

298 The SPO Underwriter Defendants are "sellers" within the meaning of the Securities

Act because the SPO Underwriter Defendants (a) transferred title to Network Commerce stock to the

members of the Class ; (b) transferred title to Network Commerce stock to other underwriters and/or

broker-dealers that sold Network Commerce stock as agents for the SPO Underwriter Defendants ;

and (c) solicited the purchase of Network Commerce stock by the Class, motivated at least in part by

a desire to serve the SPO Underwriter Defendants' own financial interests, including but not limite d

to commissions on their own sales of Network Commerce stock and separate commissions on th e

sales of Network Commerce stock by non-underwriter broker-dealers

299 Plaintiffs and the members of the Class did not know of any of the untruthful

I statements and omissions alleged and in the exercise of reasonable care could not have known of

them .

300. This action is commenced within three years of the initial public offerings and within

one year of the time plaintiffs and the other Class member purchasers of the stock discovered or

could have discovered the existence of untrue statements by exercising due diligenc e

301 . Plaintiffs and the other Class members hereby tender their common stock to the

defendants and seek rescission of their purchases to the extent that they continue to own suc h

securities


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0 S

1 COUNT VIII

2 (Against Network Commerce and Walker for Violations ofSection 11 of the Securities Act)

3302 Plaintiffs repeat and reallege only the allegations in paragraphs 14 through 16, 19

4through 52, and 202 through 217 above as though fully set forth herein .

5303 This cause of action is brought by plaintiffs pursuant to Section 11 of the Securities

6Act, 15 U.S C § 77k, on behalf of the Class against defendants Network Commerce and Walker and

7does not sound in fraud .

8304 The March 24, 2000 Registration Statement for the merger between Network

9Commerce and Ubarter (the "Ubarter Merger"), as amended on May 8, 2000 (the "Ubarter

10 Registration Statement") was inaccurate and misleading, contained untrue statements of material11

facts, omitted to state other facts necessary to make the statements made not misleading, and

12concealed and failed adequately to disclose material facts as described above .

13305. Network Commerce is the registrant for the shares sold to plaintiffs and other

14members of the Class Network Commerce issued, caused to be issued and participated in the

15issuance of materially materially false and misleading written statements to the investing public

16contained in the Ubarter Registration Statement As an issuer of the shares, Network Commerce is

17strictly liable to plaintiffs and the Class for the material misstatements or omissions

18306. Defendant Walker, either personally or through an attorney-m-fact signed the Ubarter

19Registration Statement and was a director and senior executive of Network Commerce at the time of

20the Ubarter Merger

21307. The defendants named herein were responsible for the contents and dissemination of

22the Ubarter Registration Statement None of the defendants named herein made a reasonable

23investigation or possessed reasonable grounds for believing that the statements contained in the

24Ubarter Registration Statement were true and did not omit any material facts and were not materially

25misleading .

26


CLASS ACTION COMPLAINT - 78 KELLER ROHRBACK L .L .P.1201 THIRD AVENUE, SUITE 3200

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0 J308 . Plaintiffs and the members of the Class acquired shares of Network Commerce

pursuant to, or traceable to, the Ubarter Registration Statement and did not know of untrue

statements or omissions of material facts .

309. Plaintiffs and the Class have sustained damages

310 The action is commenced within three years after Network Commerce stock was

bona fide offered to the public and the claims asserted herein were brought by plaintiffs within one

year after plaintiffs discovered or, by the exercise of reasonable diligence, should have discovered



COUNT IX

(Against Network Commerce and Walker for Violations ofSection 14 (a) of the Exchange Act)

311 . Plaintiffs repeat and reallege only the allegations in paragraphs 17, 19 through 52,

and 218 through 225 above as though fully set forth herein.

312. This cause of action is brought by plaintiffs pursuant to Section 14(a) of the Exchange

Act, 15 U S C § 78n(a), and Rule 14a-9, 17 C .F R. § 240 14a-9, on behalf of the Class against

Network Commerce and Walker.

313 The April 19, 2000 Proxy Statement pursuant to Section 14(a) of the Exchange Act

(the "Proxy Statement"), was inaccurate and misleading, contained untrue statements of material

facts, omitted to state other facts necessary to make the statements made not misleading, and

concealed and failed adequately to disclose material facts as described above .

314 Network Commerce is the registrant for the shares sold to plaintiffs and other

members of the Class. Network Commerce issued, caused to be issued and participated in the

issuance of materially false and misleading written statements to the investing public contained i n

the Proxy Statement


N ICLIENTS125269\11COM1'I:AINT AMENDED 111301 .DOC

LAW OFFICES OF

KELLER ROHRBACK L .L .Y .


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315 Defendant Walker either personally or through an attorney-m-fact signed the Prox y

Statement and was a director and senior executive of Network Commerce at the time the Proxy

Statement was issue d

316. The defendants named herein were responsible for the contents and dissem ination of

I the Proxy Statement . None of the defendants named herein made a reasonable investigation or

possessed reasonable grounds for believing that the statements contained in the Proxy Statement

were true and did not omit any material facts and were not materially misleadin g

317. Plaintiffs and the members of the Class acquired shares of Network Commerce

pursuant to, or traceable to, the Proxy Statement and did not know of untrue statements or omission s

of material facts .

318. Plaintiffs and the Class have sustained damages .

319 . The action is commenced within three years after Network Commerce stock wa s

bona fide offered to the public and the claims asserted he rein were brought by plaintiffs within one

year a fter plaintiffs discovered or, by the exercise of reasonable diligence, should have discovere d

the misrepresentations and omissions alleged herein. The price of Network Commerce stock on the

date this action was filed was below the purchase price paid by plaintiffs and members of the Clas s

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on their own behalf and on behalf of the Class, pray for judgment

as folIows-

A Declaring this action to be a proper class action and certifying plaintiffs as clas s

I representative under Rule 23 of the Federal Rules of Civil Procedu re;

B Awarding compensatory damages in favor of plaintiffs and the other members of th e

Class against all defendants, jointly and severally, for the damages sustained as a result of th e

wrongdoings of defendants, together with interest thereon ,


N \CL!E.NTs125269\I \COMPLAINT AMENDED 111301 OC

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SEATTLE WASHINGTON 98101-3052TELEPHONE ( 206) 623 1900FACSIMILE (208)623-3384

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C Awarding plaintiffs the fees and expenses incurred in this action, including

reasonable allowance of fees for plaintiffs' attorneys and experts, an d

D Granting such other and further relief as the Court may deem just and prope r

JURY DEMAND

Plaintiffs demand a trial by jury of all issues so triable

RESPECTFULLY SUB MITTED thisf

day ofNovember, 200 1

KELLER ROHRBACK, L .L.P

By U; -,,-LLynn lncoln Sarko, WSBA No 16569Elizabeth A Leland, WSBA No 23433

1201 Third Avenue, Suite 3200Seattle, Washington 98101Tel (206) 623-1900Fax (206) 623-3384

LIAISON COUNSEL FOR PLA INTIFFSAND THE CLASS

Scott A KamberThomas J HamsonWESCHLER HARWOOD HALEBIAN & FEFFER LLP

488 Madison Avenue

New York, New York 10022Tel, (212) 935-7400Fax (212) 753-363 0

STULL STULL & BRODYJules Brody6 East 45th StreetNew York, New York 10017Tel (212) 687-7230Fax (212) 490-2022

CONSOLIDATED AMENDEDCLASS ACTION COMPLA INT - 8 1

N IcLIENTS125269111CQMpLA NT AMENDED 111301 DOC

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1201 THIRD AVENUE SUITE 3200SEATTLE WASHINGTON 96101-3D52


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t •STULL STULL & BRODY

Michael Braun

Patrice Bishop10940 Wilshire Blvd, Suite 2300Los Angeles, Califorma 90024Tel (310) 209-246 8Fax (310) 209-208 7

CO-LEAD COUNSEL FOR PLA INTIFFSAND THE CLASS


N 1cLmNTS125269111CoMPLATNT AMENDED 111301 DOC

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SEATTLE, WASHINGTON 98101 3052TELEPHONE (206 ) 623-190DFACSIMILE (206) 623-3384

r '

0 coyo,nrooe-W-0The Honorable Robert S Lasnik

FILED ENTEREDLODGED RECEIVE D

NOV 1 3 2001 K NAT SEATTLE

CLERK U S DISTRICT COURTWESTERN DIS NCr OF WASHINGTO N

BY DEPUTY

UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WASHINGTO N

IN RE NETWORK COMMERCE INC )SECURITIES LIGITATION )

THIS DOCUMENT RELATES TO- )

ALL ACTIONS )

No C01-0675

CERTIFICATE OF SERVIC E

The undersigned certifies under the penalty of perjury under the laws of the United

States and the State of Washington that on November 13th, 2001 , I caused to be served in the

manner noted below, a copy of the following document s

1 . Consolidated Class Action Complaint, and

2. this Certificate of Servic e

VIA MESSENGER :

Stellman KeehnelBrian BuckleyGRAY, CARY, WARE &FREIDENRICH, L.L.P .999 Third Avenue, Suite 4000Seattle , WA 98101

Karl Phillip BarthSteven W BermanHAGENS BERMAN LL P1301 Fiftb Avenue, Suite 2900Seattle, WA 9810 1

CERTIFICATE OF SERVICE - 1

N \CLIENTS125269%11CERTIFICATE OF SERVICE 091201 DOC ORIGINAL

•Murray T S . LewisSteven J TollCOHEN MILSTEIN HAUSFELD &TOLL, PLLC999 Third Avenue, Suite 3600Seattle, WA 98104-400 1

Peter Scott EhrlichmanTim J FilerFOSTER PEPPER AND SHEFELMAN1111 Third Avenue, Suite 3400Seattle, WA 98101-3299

VIA U.S. MAIL

Clifford Allen Cantor627 - 208th Avenue SoutheastSammamish , WA 98074-703 3

Bruce G . MurphyLaw Offices of Bruce G. Murphy265 Llwyds LaneVero Beach, FL 32963

Steven E . CauleyCAULEY, GELLER, BOWMAN &COATES, LLPP O Box 2543 8Little Rock, AR 72221-5438

Brian M FelgoiseLaw Offices of Brian M230 South Broad StreetSuite 404Philadelphia, PA 19102

•Lori G. FeldmanMILBERG WEISS BERSHADHYNES & LERACH1001 Fourth Avenue, Suite 3200Seattle, WA 98154

Marc A TopazSCHIFFRIN & BARROWAY3 Bala Plaza East, Suite 400Bala Cynwyd, PA 1900 4

Charles J PivenLaw Offices of Charles J . Pleven, P A .The World Trade Center401 East Pratt Street, Suite 2525Baltimore, MD 2120 2

Marc S. HenzelLaw Offices of Marc S Henzel210 West Washington SquareThird FloorPhiladelphia, PA 19106-3503

Jules BrodyFelgoise Aaron Brody

Tzivia Brod ySTULL, STULL & BRODY6 East 45th Street , 4th FloorNew York, NY 1001 7

Gregory M . NespoleWOLF HALDENSTEIN ADLERFREEMAN & HERZ, LL P270 Madison AvenueNew York , NY 1001 6


William S . LerachHelen J HodgesStephanie SchroderMILBERG WEISS BERSHADHYNES & LERACH LL P600 West Broadway, Suite 1800San Diego, CA 92101-505 0

N \CLIENTS\25269\1\CERTuICATE OF SERVICE 091201 Doc

0

Scott A KamberThomas J HarrisonWECHSLER HARWOODHALEBIAN & FEFFER LLP488 Madison Avenue , 8th FloorNew York, NY 10022

Evan J SmithBRODSKY & SMIT H11 Bala Avenue, Suite 39Bala Cynwyd, PA 19004

Dated this 13th day of November, 2001, at Seattle ,


0

Joseph H WeissWEISS & YOURMAN551 Fifth Avenue , Suite 1600New York, NY 10176

Michael D . BraunSTULL, STULL & BRODY10940 Wilshire BoulevardSuite 2300Los Angeles, CA 90024

N \CLIENT5125269\1\CERTIAICATE OF SERVICE 091201 DOC

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2 Consolidated Amended Class Action Complaint 11/13/2001

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