in the united states district court for the...

Case 1:08-cv-03462-JOF Document 52 Filed 09/30/11 of 67

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

Catherine Anastasio, Individually and on behalf of all other similarly situated, et al.,

: Plaintiffs, :

:

CIVIL ACTION NO.

1:08-cv-03462-JOF v. :

:

Internap Network Services Corp.,

et al.,

Defendants.

:

:

:

:

ORDER

This matter is before the court on Defendants Internap Network Services Corp.,

David Buckel and James DeBlasio’s Motion to Dismiss Plaintiffs’ Fourth 1 Amended Class

Action Complaint [49].

I. Background

1 Although Plaintiffs’ operative complaint is labeled their Third Amended Complaint,

the court will refer to it as Plaintiffs’ Fourth Amended Complaint to avoid confusion (the

court referred to Plaintiffs’ previous proposed complaint as their Third Amended Complaint

in its order dated September 15, 2010).

:

:

:

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This is a federal securities class action filed against Internap Network Services Corp.

(“Internap”) and two of its former officers, David Buckel and James DeBlasio. Plaintiffs

bring their claims under the federal Securities Exchange Act of 1934 (“Exchange Act”),

alleging that Internap, Buckel and DeBlasio violated the Exchange Act by knowingly or

recklessly making false or misleading statements that artificially inflated Internap stock

prices, and Defendants continued making false or misleading statements throughout the class

period in order to maintain those artificially inflated prices.

A. Parties

Lead Plaintiffs Catherine Anastasio, Stephen Anastasio, Curtis Whitaker, Patricia

Espada and Fred Matise bring these claims on behalf of all persons or entities that purchased

and/or acquired common stock of Internap during the period of March 28, 2007 through

August 5, 2008 (the “Class Period”). D.E. [46], at 1. Plaintiffs, Catherine Anastasio, Stephen

Anastasio, Curtis Whitaker, Patricia Espada and Fred Matise claim that they purchased the

publicly traded common stock of Internap at artificially inflated prices during the class

period. Id. ¶¶ 25-26.

Defendant Internap “provides Internet connectivity solutions to business customers

who require business applications such as e-commerce, video and audio streaming, customer

relationship management, voice over Internet protocol, virtual private networks, and supply

chain management.” Id. ¶ 2. Internap “also provides managed intelligent routing services,

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data center services, and flow control platform.” Id. Its products and services are “delivered

worldwide by IP access services, such as co-location and data center services, managed

security services, pre/post installation services and consulting, and the Company’s core

growth potential product, its content distribution network.” 2 Id. Internap’s stock was listed

and actively traded on NASDAQ throughout the class period. Id. ¶ 27. Defendant DeBlasio

was the President and CEO of Internap during the class period, while Defendant Buckel

served as Internap’s Vice President and Chief Financial Officer from at least the beginning

of the class period until November 18, 2007. Id. ¶¶ 28-29.

VitalStream, a relevant non-party to this action, was a company that specialized in

CDN services and also provided video and audio streaming services. See D.E. [37-3], ¶¶ 3,

27.

B. Procedural History

Plaintiffs brought the present action on November 12, 2008, alleging that Defendants

violated §§ 10(b) and 14(a) of the Exchange Act, SEC Rules 10b-5 and 14a-9, and that the

individual Defendants have controlling persons liability under § 20(a) of the Exchange Act.

After filing their first Amended Complaint and Corrected Amended Complaint, Plaintiffs

sought leave of the court to amend their complaint once again. Attached to Plaintiffs’

2 The court will refer to content distribution network as “CDN.”

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Motion for Leave to File was Plaintiffs’ proposed Third Amended Complaint. 3 Prior to the

court allowing Plaintiffs to file their Corrected Amended Complaint, and after the first

amended complaint was filed, Defendants filed Motions to Dismiss on September 11, 2009.

On September 15, 2010, this court ruled on Defendants’ Motions to Dismiss and

Plaintiffs’ Motion for Leave to File. In its order, the court addressed whether Plaintiffs’

proposed Third Amended Complaint survived Defendants’ pending motions to dismiss. The

court granted Defendants’ Motions to Dismiss as to Plaintiffs’ § 14(a) claim, denied it in all

other respects, and gave Plaintiffs one final opportunity to re-plead their claims.

C. Factual History and Contentions

The following facts are drawn from the Complaint, presumed true for the purposes

of the motion to dismiss, and construed in the light most favorable to the Plaintiffs. See Duru

v. HSBC Card Services, Inc. , 411 Fed. Appx. 240, 241 (11th Cir. 2011). 4 On October 12,

3 Although Plaintiffs referred to it as their Second Amended Complaint, it technically

was Plaintiffs’ third complaint and the court referred to it as such in its September 15, 2010,

order.

4 When considering a motion to dismiss pursuant to Rule 12(b), generally the court

must only look to the pleadings. Fed. R. Civ. P. 12(b). The Eleventh Circuit has concluded,

however, that the court may also consider documents that are referred to in the complaint

and are “central” to the Plaintiffs’ claims, provided that their contents are not in dispute.

Harris v. Ivax Corp. , 182 F.3d 799, 802 n. 2 (11th Cir. 1999). Further, because this is a securities fraud class action, the court may take judicial notice of other documents and

information required to be filed, and actually filed, with the Securities and Exchange

Commission. See Bryant v. Avado Brands, Inc. 187 F.3d 1271, 1278 (11th Cir. 1999).

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2006, Internap issued a press release, announcing that it had agreed to acquire VitalStream.

Fourth Amended Complaint, ¶ 55. On January 12, 2007, Internap filed a Form 424B3 Joint

Proxy Statement/Prospectus with the SEC, soliciting shareholder proxies to vote in favor of

the VitalStream acquisition. Id. ¶ 56. The Proxy Statement included an allocation of the

purchase price of VitalStream, with approximately $153.4 million of the price allocated to

goodwill. Id. Following a successful shareholder vote, Internap completed the acquisition

of VitalStream on February 20, 2007. Id. ¶ 58.

After the acquisition, and over the next 14 months, Defendants made a number of

statements through press releases, conference calls, and documents filed with the SEC that

Plaintiffs contend were false and/or misleading. In these press releases, conference calls and

SEC filings, the Defendants generally touted that Internap was successfully in the process

of or successfully had integrated VitalStream’s CDN into its own network, that Internap’s

customer base had increased and demand for Internap’s services was growing, and that the

company was posting record revenues and would continue to do so. The purportedly false

and/or misleading statements occurred from March 2007 to May 2008. In general, Plaintiffs

allege that Defendants fraudulently failed to disclose to investors that Internap was having

serious problems integrating VitalStream’s CDN and, as a result, suffered from service

outages and customer billing and collections problems.

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Plaintiffs contend that problems with the VitalStream acquisition arose immediately.

Plaintiffs rely heavily on a whistleblower complaint filed by Keith Werle, who was the

Director of Financial Planning and Analysis at Internap from July 5, 2006 until May 1, 2007.

Id. ¶ 67. According to Plaintiffs, by March of 2007, the start of the class period, Werle had

discovered a multitude of problems with the VitalStream transaction and relayed that

information to Defendant Buckel. Id. Werle uncovered “significant adverse information

regarding the financial and operational condition of VitalStream” through former employees

and senior management of VitalStream and during the course of his planning and analysis

for Internap of its newly acquired unit. Id. In one example, Werle visited the main office of

one of VitalStream’s units in Knoxville, Tennessee during the week of March 6, 2007. Id.

¶ 68. Werle discovered that there were problems with the operational condition of the unit,

its technology, and the prospects for sales. The outlook for that unit was subsequently

reduced from $6.7 million in sales to less than $2 million for 2007. Id.

Werle’s whistleblower complaint details other problems that he discovered related

to the VitalStream acquisition. Also during March 2007, Werle states that the revenue

outlook for the first quarter of 2007 for one business unit was lowered from approximately

$6.5 million to less than $4.8 million. See Fourth Amended Compl., Exh. 1, at 3 (“Werle

Complaint”). This reduction was attributed to “continued operational problems,” resulting

in “higher than expected sales and billing credits, higher customer billing disputes,” and

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“continued billing accuracy problems,” resulting in “over billing,” both of which led to

“customer credits, high churn rates and lower than expected new customer sales.” Id. Werle

also noted that during the same period, the outlook for VitalStream’s CDN unit, its largest

business unit, was lowered from over $32 million in sales for 2007 to less than $26 million.

Id. During the week of March 28, 2007, Werle expressed his growing concerns regarding

the acquisition to Defendant Buckel, both in person and via email. Id. Werle told Buckel that

he was going to see if he could figure out how the integration plan “could have been so far

off the mark.” Id.

Also discussed in Werle’s complaint is a memo sent from Eric Mersch, the former

CFO of VitalStream, to Defendant Buckel, on or about April 9, 2007. Id. This memo

outlined adverse disclosures and discoveries related to the internal controls, accounting and

reporting practices and the financial and operational condition of VitalStream. It included

“specific disclosures of irregular accounting (non-GAAP), non-standard reporting (SEC)

practices as well as accounting control deficiencies (SOX).” Id. According to Werle, the

memo contained a list of questionable customer accounts receivables, including some very

large accounts that had been in dispute for many months. Id. Plaintiffs assert that this led

VitalStream to overstate approximately ten percent of its total revenue on an annual basis.

The memo also contained a list of customers that had not paid a bill in as long as 18 months

and some customers that had never paid a bill. Id. at 4.

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In a period of less than six weeks, from March 12 to on or about April 20, 2007,

Werle states that the outlook for VitalStream had been reduced from approximately $39

million in revenue for 2007 to approximately $21 million. Id. Additionally, write-offs,

adjustments and impairment charges to tangible assets accumulated to almost $4 million, or

30 percent of the approximately $12 million in total tangible assets acquired from

VitalStream. Id. Werle thus recommended to Buckel, both in person and via email, that they

conduct a comprehensive review of the acquisition to “determine what went wrong to cause

such grave misunderstandings; whether there were additional areas of risk or potential

problems; and whether the misunderstandings and irregularities were the result of legitimate

mistakes or oversights in planning and or due diligence . . ., deliberate or negligent

misrepresentations, or at worst malfeasance.” Id.

On April 27, 2007, Werle discovered an inter-company accounting error that resulted

in over $200,000 of wrongly recognized revenue and sent an email to Buckel expressing his

frustration over the “seemingly endless stream of accounting mistakes and problems that

continued to stem from the due diligence, integration planning, and the integration team

assigned to the acquisition.” Id. On April 30, 2007, Werle again spoke to Buckel, this time

about Internap’s exposure if the VitalStream deal was subject to any impairment test,

valuation, updated representations, audit or external disclosures in the near future, and

whether impairment testing under the Financial Accounting Standards Board rules had been

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triggered or would be triggered by any planned activities. Id. at 5. Werle told Buckel that he

was concerned that if Internap was subject to such a test in the coming months, Internap

could be subject to as much as a $50 million write-down. Id. at 6.

That same day, Werle also discussed with Buckel a bank due diligence package that

Buckel had asked Werle to take the lead in assembling for the $50 million in debt financing

that Internap was seeking. Id. at 6. Werle expressed his discomfort about the potential

conflicts in the documentation and representations that Internap may have to make

concerning the acquisition, the associated assets (including goodwill), and the condition and

outlook of VitalStream’s business units. Id. Werle informed Buckel that he was not

comfortable that Internap could provide the same documents and representations to the bank

as it did to the external auditors for the transaction (who provided the valuation, fairness

opinion and impairments test) without noting some of the material adverse discoveries that

had been made since the closing. Id.

In his complaint, Werle also states that he believed a number of potential accounting,

disclosure and reporting issues should’ve been addressed as Internap prepared its quarterly

financial statements, SEC filings and audit exhibits and documentation. Id. at 4. Werle notes

that as of April 25, 2007, he did not believe that the Internal Audit, the Audit Committee,

Outside Auditors, Financial Intermediaries, nor the Board of Directors had been informed

of any material adverse discoveries relating to the VitalStream acquisition. Id.

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Werle was dismissed from Internap on May 1, 2007, and filed his whistleblower

complaint with the Occupational Safety and Health Administration on May 30, 2007. Id. at

1. Werle contends that he was fired in retaliation for his investigation and reporting of

financial and accounting irregularities and/or misrepresentations that may have been in

violation of SEC rules and regulations and/or state and federal laws. Id.

Plaintiffs also rely on 22 confidential witnesses who support Plaintiffs’ assertions that

Internap had “severe problems” integrating VitalStream into Internap. For instance, one

confidential witness stated that the “integration was run very poorly” and that Internap

“didn’t have a handle on it.” Id. ¶ 75. Another stated that the integration was a “disaster” and

that Internap had “no understanding of how to do CDN.” Id. ¶ 81. The confidential witness

allegations will be discussed more fully when the court addresses each allegedly false and/or

misleading statement.

These integration problems led to outages and other service problems for customers,

which began to occur frequently in May 2007, according to one confidential witness. Id. ¶

113. Defendant DeBlasio remarked on May 7, 2008, that “These outages reflected

integration challenges [Internap] experienced by moving traffic from the legacy VitalStream

systems to Internap platforms.” Id. ¶ 177. The outages led to customer complaints and

demands for credits. Id. ¶ 100. To make matters worse, Internap’s process for granting

credits was “complicated and lengthy,” leading to even more customer complaints. Id. ¶ 192.

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These problems combined to cause Internap to lose customers. Id. Plaintiffs argue that,

despite all of the issues Internap was facing in trying to integrate VitalStream, Defendants

repeatedly indicated that the integration was going well, that Internap was gaining

momentum and experiencing customer growth, and that Internap was going to reach record

revenue levels due to the success of its newly acquired business. Plaintiffs assert that such

statements were false and/or misleading, that they artificially inflated Internap stock prices,

and that they violated § 10(b) of the Exchange Act, 15 U.S.C. § 78j, and SEC Rule 10b-5.

Plaintiffs further allege that individual Defendants Buckel and DeBlasio have controlling

persons liability under § 20(a) of the Exchange Act. The court will examine all of the

purportedly false and misleading statements and omissions in greater detail below, when the

court addresses the sufficiency of the Plaintiffs’ pleadings.

Next, Plaintiffs argue that Defendants admitted the falsity of their previous statements

in three separate disclosures. In a November 6, 2007, conference call with investors

regarding third quarter earnings, Defendant DeBlasio stated that Internap was “one month

behind” where he would like it to be in the integration process. Id. ¶ 131 Defendant

DeBlasio also stated, however, that the two companies were now “fully integrated,” despite

the delay. Id. After the conference call, Internap’s stock dropped from $16.94 per share on

November 6, 2007, to $13.41 per share on November 9, 2007. Id. ¶ 135.

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On March 18, 2008, Internap issued a press release disclosing that:

(i) [Internap] would delay filing its Form 10-K Annual Report for the fourth

quarter and full-year 2007;

(ii) [Internap] would refund several hundred customers a total of $1-2 million

previously reported and recognized as revenues;

(iii) [Internap’s] reduction in revenues was due to service outages in the

months of August, September, and October, which caused customers to

request their accounts be credited;

(iv) $400,000 previously identified as unrealized gain within stockholder’s

equity should have been included as accretion of interest income in the 2007

statement of operations; and

(v) [Internap] should have recorded an additional amount of less than

$100,000 as accrued interest.

Id. ¶ 19. Internap also revealed that its recent customer count was inaccurate. Id. Following

this press release, Internap’s stock price dropped from $6.12 per share on March 18, 2008,

to $4.09 per share on March 19, 2008. Id. ¶ 21.

Finally, on August 5, 2008, Internap “announced its second quarter 2008 earnings

and that it recorded a $3.2 million loss, primarily related to [Internap’s] need to take an

additional reserve of $3.0 million for CDN receivables that were doubtful of collection.” Id.

¶ 20. Internap’s stock then dropped from $4.38 per share on August 5, 2008, to $2.90 per

share on August 6, 2008. Id. ¶ 21.

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II. Discussion

In its order dated September 15, 2010, the court granted in part and denied in part

Defendants’ Motions to Dismiss Plaintiffs’ Amended Class Action Complaint. The court

agreed with Defendants that Plaintiffs’ Third Amended Complaint failed to meet the

requirements of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4,

et seq. , but nonetheless permitted Plaintiffs one final opportunity to re-plead their claims.

With this context in mind, the court addresses Plaintiffs’ claims below.

A. Section 10(b) Claims

Defendants move to dismiss Plaintiffs’ Fourth Amended Complaint on the grounds

that Plaintiffs have again failed to meet the pleading requirements of the PSLRA.

Defendants argue that, despite the court’s direction, (1) Plaintiffs fail to plead the false

and/or misleading statements with particularity, (2) Plaintiffs fail to adequately plead

scienter, and (3) Plaintiffs attempt to base liability on statements that are corporate puffery

or protected by PSLRA’s safe harbor for forward-looking statements.

“Section 10(b) and Rule 10b-5 make it unlawful for any individual to employ a

manipulative or deceptive device in connection with the purchase or sale of any security.”

Garfield v. NDC Health Corp. , 466 F.3d 1255, 1261 (11th Cir. 2006). To allege securities

fraud under Rule 10b-5, Plaintiffs must show: “1) a misstatement or omission, 2) of a

material fact, 3) made with scienter, 4) on which plaintiff relied, 5) that proximately caused

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his injury.” Id. (internal quotations and citations omitted). To survive a motion to dismiss,

a complaint alleging violations of the Exchange Act must not only meet the requirements

of Federal Rule of Civil Procedure 8, but also the heightened pleading standards of the

PSLRA and Federal Rule of Civil Procedure 9(b).

Rule 9(b) provides that claims of fraud must be stated with particularity, and

Rule 9(b) is satisfied if the complaint sets forth (1) precisely what statements

were made in what documents or oral representations or what omissions were

made, and (2) the time and place of each such statement and the person

responsible for making (or, in the case of omissions, not making) same, and

(3) the content of such statements and the manner in which they misled the

plaintiff, and (4) what the defendants obtained as a consequence of the fraud.

A sufficient level of factual support for a [10b] claim may be found where

thecircumstances of the fraud are pled in detail. This means the who, what,

when[,] where, and how: the first paragraph of any newspaper story.

Garfield, 466 F.3d at 1262 (internal quotations and citations omitted). Additionally, the

PSLRA requires that the complaint “specify each statement alleged to have been misleading,

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

statement or omission is made on information and belief, the complaint shall state with

particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).

The PSLRA also raised the standard for pleading scienter in securities fraud cases.

Mizzaro v. Home Depot, Inc. , 544 F.3d 1230, 1238 (11th Cir. 2008). “[T]he complaint shall,

with respect to each act or omission alleged to violate this chapter, state with particularity

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facts giving rise to a strong inference that the defendant acted with the required state of

mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added). Plaintiffs cannot plead scienter generally.

Rather, “the complaint must allege facts supporting a strong inference of scienter ‘for each

defendant with respect to each violation.’” Mizzaro , 544 F.3d at 1238. Scienter means the

“intent to deceive, manipulate, or defraud,” or “severe recklessness.” Id. The Eleventh

Circuit has defined severe recklessness as being:

[L]imited to those highly unreasonable omissions or misrepresentations that

involve not merely simple or even inexcusable negligence, but an extreme

departure from the standards of ordinary care, and that present a danger of

misleading buyers or sellers which is either known to the defendant or is so

obvious that the defendant must have been aware of it.

Id. Thus, Plaintiffs “must (in addition to pleading all of the other elements of a § 10(b)

claim) plead ‘with particularity facts giving rise to a strong inference’ that the defendants

either intended to defraud investors or were severely reckless when they made the allegedly

materially false or incomplete statements.” Id.

In Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308 (2007), the Supreme

Court elaborated on the scienter requirement in securities fraud class actions. The Court held

that “an inference of scienter must be more than merely plausible or reasonable-it must be

cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. at

314. Furthermore, when analyzing scienter, the court must consider the entire complaint and

all facts alleged therein, rather than whether “any individual allegation, scrutinized in

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isolation, meets that standard.” Id. at 323. The court is also required to balance opposing

inferences, and:

To determine whether the plaintiff has alleged facts that give rise to the

requisite “strong inference” of scienter, a court must consider plausible

nonculpable explanations for the defendant's conduct, as well as inferences

favoring the plaintiff. The inference that the defendant acted with scienter

need not be irrefutable, i.e., of the “smoking-gun” genre, or even the “most

plausible of competing inferences[.]” . . . A complaint will survive . . . only

if a reasonable person would deem the inference of scienter cogent and at

least as compelling as any opposing inference one could draw from the facts

alleged.

Id. at 323-24. The Court also noted that the lack of any suspicious stock sales, or pecuniary

motive, is not fatal to a plaintiff’s claim. See id. at 325.

The PSLRA further provides defendants with a statutory safe harbor for certain

forward-looking statements. See 15 U.S.C. §§ 77z-2(c), 78u-5(c). A forward-looking

statement is defined as one that is “identified as a forward-looking statement, and is

accompanied by meaningful cautionary statements identifying important factors that could

cause actual results to differ materially from those in the forward-looking statement,” or one

that is “immaterial.” 5 15 U.S.C. § 78u-5(c)(1)(A). A statement is immaterial as a matter of

5 The term “forward-looking statement” means

(A) a statement containing a projection of revenues, income (including

income loss), earnings (including earnings loss) per share, capital

expenditures, dividends, capital structure, or other financial items;

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law where it is merely indicative of corporate optimism or puffery. See In re Airgate PCS,

Inc. Sec. Litig., 389 F. Supp. 2d 1360, 1378 (N.D. Ga. 2005) (Forrester, J.). “Even if the

forward-looking statement has no accompanying cautionary language, the plaintiff must

prove that the defendant made the statement with ‘actual knowledge’ that it was ‘false or

misleading.’” Harris v. Ivax Corp. , 182 F.3d 799, 803 (11th Cir. 1999). If the cautionary

language is present, the court need not inquire into the defendant’s state of mind. Id. at 803.

(B) a statement of the plans and objectives of management for future

operations, including plans or objectives relating to the products or services

of the issuer;

(C) a statement of future economic performance, including any such statement

contained in a discussion and analysis of financial condition by the

management or in the results of operations included pursuant to the rules and

regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement

described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the

extent that the report assesses a forward-looking statement made by the issuer;

or

(F) a statement containing a projection or estimate of such other items as may

be specified by rule or regulation of the Commission.

15 U.S.C. § 78u-5(I).

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Plaintiffs have reorganized their Complaint and divided it into sections corresponding

to each allegedly false and/or misleading statement. The court will address each statement

in turn.

1. March 28, 2007, Press Release

Plaintiffs’ Fourth Amended Complaint alleges that Defendants’ first false and

misleading statement was made on March 28, 2007. In a press release issued on that date,

“Internap announced it had ‘successfully migrated VitalStream Advertising and Media

Services’ into its own network, boasting of improvements in the combined company’s

ability to deliver higher performance into the marketplace and better customer connectivity.”

Fourth Amended Compl., ¶ 73. The press release was signed by Defendant Buckel and filed

with the SEC.

Plaintiffs argue the March 28, 2007, press release was false and misleading because

the Defendants failed to disclose the problems they were having in trying to integrate

VitalStream into Internap. Internap, Plaintiffs claim, was not able to deliver higher

performance to its customers because it was facing billing and operational problems. As

further evidence that the press release was false and misleading, Plaintiffs point to meetings

that Werle participated in where the revenue of VitalStream units was lowered because of

“continued operational problems, higher customer credits and disputes and lower new

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customer sales.” Id. ¶ 74. The sales figures for Internap’s CDN unit were lowered by

approximately 22 percent during this time. Id.

Defendants respond that Plaintiffs have conveniently taken the statement out of

context to support their claim. Read in full, the press release states that Internap “has

successfully migrated VitalStream Advertising and Media services through its proprietary

Private Network Access Points (P-NAP) for premium network connectivity and

performance, signifying progress in the integration of the two companies’ products and

services.” Defendants’ Mot. to Dismiss, Exh. 5, at 9. The press release goes on to state that

“[d]elivering these applications across the Internap P-NAP significantly improves IP

connectivity and performance for customers using the service to monetize digital assets.”

Id. Defendants urge that, in context, the press release makes clear that this was just one step

in the integration process and did not represent the successful completion of the integration.

Defendants argue that Plaintiffs have not pled this misstatement or omission with

particularity. Defendants insist that the Complaint offers no well-pled allegations that the

Advertising and Media Services segment of Vitalstream was not migrated successfully to

Internap’s P-NAP. Advertising and Media services was a separate segment from CDN

services at VitalStream. Defendants also submit that Plaintiffs have failed to plead with

particularity what problems the Defendants should have disclosed, how those problems were

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related to VitalStream’s advertising services segment, and why that information made the

statements false and misleading.

The court agrees with Defendants that Plaintiffs have offered no link between the

integration challenges encountered by Internap and the migration of VitalStream Advertising

and Media Services. Absent any information concerning how the integration problems

identified by Werle and Plaintiffs’ confidential witnesses affected the migration of an

entirely different business segment, or any allegations that the migration was unsuccessful

at the time of the press release, Plaintiffs have not adequately alleged that Defendants’

statement regarding the successful migration of VitalStream’s advertising services was false

and misleading at the time it was made. Similarly, the progress and improvements that

Defendants “boast” of in the press release relate to the advertising and media services unit,

while the problems that Plaintiffs discuss are general “operational and billing” problems that

have no specific ties to Defendants’ statements. Plaintiffs have not adequately alleged that

the existing operational and billing problems made Defendants’ statements false and

misleading. Consequently, Plaintiffs’ claims relating to the March 28, 2007, press release

fail.

2. April 16, 2007, Statement

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Plaintiffs next take aim at Defendants’ April 16, 2007, announcement of a global

expansion of Internap’s VitalStream CDN services. Specifically, Defendant DeBlasio stated:

For more than a decade, customers have come to rely on Internap for our

Internet expertise, and trust us for our ability to reliably and safely deliver

their mission critical business applications with speed. . . .Internap’s network

will be scaled to deliver the industry’s most robust solution, meeting the needs

of customers in the rapidly growing streaming media and content delivery

market.

Fourth Amended Compl., ¶ 79. Plaintiffs claim that the announcement of a global expansion

was false and misleading because the Defendants failed to disclose that VitalStream had

never collected revenue from international customers and had no experience in collections

of foreign currency. Plaintiffs argue that while Internap claimed that it would enhance

performance and reliability for its clients and DeBlasio stated that they would meet the

needs of customers, those needs were not being met. As several confidential witnesses

stated, VitalStream had operational problems from the time it was acquired, so Internap was

not able to enhance performance, speed and reliability.

Defendants respond that the statements identified by Plaintiffs are not false or

misleading because there are no well-pled allegations that customers had not come to rely

on Internap for Internet expertise, that Internap was not planning on expanding its CDN

services globally, or that Internap had no plans to scale its network to deliver the industry’s

most robust solution. Additionally, Plaintiffs do not offer any reason why VitalStream’s

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purported inexperience in collecting foreign revenues had anything to do with Internap or

Internap’s announced expansion. Defendants also contend that DeBlasio’s quoted statement,

as well as Internap’s announcement regarding its expansion plans and intent to scale its

network, were forward-looking statements protected under the PSLRA’s safe harbor.

The court begins its analysis with the first half of Defendant DeBlasio’s quoted

statement. Defendant DeBlasio stated that “For more than a decade, customers have come

to rely on Internap for our Internet expertise, and trust us for our ability to reliably and safely

deliver their mission critical business applications with speed.” Fourth Amended Compl.,

¶ 79. This is the type of vague, corporate puffery that is immaterial as a matter of law.

DeBlasio is speaking in very general terms about Internap’s reputation among customers

over the previous ten years. His statement is a “soft, puffing statement[], incapable of

objective verification.” Grossman v. Novell, Inc. , 120 F.3d 1112, 1121-22 (10th Cir. 1997).

No reasonable investor would rely on this statement in making an investment decision. See

In re Ford Motor Co. Securities Litigation, 381 F.3d 563, 570 (6th Cir. 2004) (holding

immaterial as a matter of law statements such as “Ford has its best quality ever,” “Ford is

a worldwide leader in automotive safety,” and “Ford’s greatest asset is the trust and

confidence . . . [it] has earned from . . . [its] customers.”).

In the second half of his statement, DeBlasio stated that “Internap’s network will be

scaled to deliver the industry’s most robust solution, meeting the needs of customers in the

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rapidly growing streaming media and content delivery market.” Fourth Amended Compl.,

¶ 79. The court agrees with Defendants that Plaintiffs have not pled any allegations

suggesting that Internap did not have plans to scale its network and improve customers’

satisfaction. Plaintiffs point out that Werle, Mersch and the confidential witnesses had

observed by this time operational and billing problems at VitalStream, but even if these

problems were known to the Defendants, there is no evidence that Defendants did not still

have plans to scale Internap’s network. Additionally, Plaintiffs have not alleged that Internap

was actually unable to scale its network.

Finally, Plaintiffs insist that Internap’s announcement of a global expansion was false

and misleading because the Defendants did not disclose that VitalStream, the acquired

company, had never collected revenue from foreign customers and had no experience in

collection of foreign currency. Yet, as Defendants point out, these allegations do not speak

to Internap’s experience in foreign collections. Allegations concerning the smaller acquired

company’s experience collecting foreign revenue do not tell the court anything about

Internap’s ability to collect revenue from international customers. Even if it did, companies

that expand their businesses to reach international customers do not have those customers

to begin with, and thus don’t have experience collecting from those customers. That is the

reason they are expanding.

3. May 3, 2007, Earnings Release and Conference Call

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a. False and Misleading

Plaintiffs allege that many statements in Internap’s May 3, 2007, press release and

conference call were false and misleading at the time they were made. In the press release,

which was attached to a Form 8-K signed by Buckel and filed with the SEC, DeBlasio stated

that Internap had made “significant progress in the integration of VitalStream.” Fourth

Amended Compl., ¶ 109. DeBlasio also stated that “[b]ased on the recurring revenue nature

of our business model and the quality of our sales pipeline, particularly in CDN, we believe

that our results will continue to improve throughout 2007.” Id. Plaintiffs argue these

statements were false and misleading because, as Werle pointed out, severe problems existed

in the integration process. Plaintiffs also rely on the statements of their confidential

witnesses that problems with VitalStream arose from the start. Plaintiffs argue that given the

problems identified by Werle and others, any claim of significant progress regarding the

integration or continued improvement throughout 2007 was false and misleading.

Defendants respond that the statements were not false and not pled with particularity.

As to particularity, Defendants argue that Plaintiffs have failed to specify the precise

statements alleged to be false and misleading. Defendants further contend that Internap’s

results did in fact continue to improve throughout 2007, and therefore Plaintiffs have failed

to allege adequately that Defendants’ statements were false. Defendants also submit that

their claim of “significant progress in the integration of VitalStream” was an immaterial

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statement of corporate optimism and that the statement regarding results continuing to

improve throughout 2007 was a protected forward-looking statement.

The court initially notes that, contrary to Defendants’ assertion, Plaintiffs have

specified precisely the statements they allege are false and misleading. In paragraph 109 of

their Complaint, Plaintiffs block quote from the press release. In paragraph 112, Plaintiffs

specifically quote and identify the statements from the press release they allege are false and

misleading and give their reasons why.

The court also disagrees with Defendants that the statement that Internap had made

significant progress in the integration of VitalStream was an immaterial statement of

corporate optimism. It is not mere puffery to state that Internap had made significant

progress in the integration of a newly acquired business unit. It is not a vague statement

incapable of objective verification. It is a statement about how well Internap is integrating

VitalStream and it sends a clear signal to investors about the state of affairs at Internap. That

state of affairs is belied by statements in Werle’s whistleblower complaint and Mersch’s

memo.

By May 3, 2007, Werle had already discovered a litany of problems with VitalStream

and told Buckel he was going to try to figure out how the integration plan was “so far off

the mark.” Werle Compl., at 3. On April 27, 2007, less than a week before the May 3 press

release, Werle sent Buckel an email expressing his frustration over “the seemingly endless

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stream of accounting mistakes and problems that continued to stem from the due diligence,

integration planning, and the integration team assigned to the acquisition.” Id. at 4. By then,

Mersch had also sent Buckel a memo regarding customer relationship, accounting and

collections problems at VitalStream. Id. at 3. These statements indicate that Internap

encountered significant problems integrating VitalStream. Thus, the court concludes that

Plaintiffs have adequately alleged that Defendants’ statement concerning Internap’s progress

in the integration of VitalStream was false and misleading at the time it was made.

As to Defendants’ statement that Internap’s results would continue to improve

throughout 2007, the court agrees with Defendants that Plaintiffs have failed to adequately

allege that this statement was false and misleading. First, the statement refers to Internap’s

financial results as a company and not to any particular business unit within Internap.

Second, Internap’s financial results did improve throughout 2007, as evidenced by

Defendants’ SEC Form 10-K/A filed on April 30, 2008. See Defendants’ Mot. to Dismiss,

Exh. 13, at F.39 (Revenues, net income and earnings per share all improved each quarter,

despite the adjustments).

Next, Plaintiffs allege that DeBlasio made several false and misleading statements

during Internap’s first quarter 2007 earnings conference call on May 3, 2007. First, Plaintiffs

allege that DeBlasio’s statement that the CDN “platform deliver[s]” was false and

misleading at the time it was made. Fourth Amended Compl., ¶ 113. In support, Plaintiffs

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quote three confidential witnesses. CW4 6 stated that there were major problems in the

integration of VitalStream’s CDN, which caused many outages and other service problems

for customers. According to CW4, stated that these outages and service problems occurred

frequently from May 2007. CW6 7 stated that Internap had “major problems” with the

integration and that even before the acquisition, VitalStream had “major storage problems

which led customers’ files to periodically disappear on the CDN for no reason.” Id. CW78

stated that the integration was a “disaster” and that Internap had “no understanding of how

to do CDN.” Id. Plaintiffs rely on two other confidential witnesses who also suggest there

were major problems with the integration and that VitalStream suffered storage problems

even before the acquisition.

Defendants respond that Plaintiffs have improperly summarized DeBlasio’s statement

in their own words rather than specifying the precise statement they allege to be false and

misleading. Defendants also argue that Plaintiffs fail to plead particular facts showing how

the VitalStream problems impacted the integration process and how the integration was a

6 CW4 worked as a Senior Network Engineer at VitalStream and then at Internap

until September 2007. Fourth Amended Compl., 1 36.

7 CW6 worked at VitalStream from March 2000 and then joined Internap, where he

was a manager of major accounts. Id. 1 38.

8 CW7 was a Senior CDN Account Manager throughout the class period. Id. 1 39.

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“disaster” in May 2007, and thus fail to demonstrate that DeBlasio’s statement was false and

misleading.

In the conference call, DeBlasio noted that Internap had added 106 net new

customers, including 54 in the CDN business unit. He then went on to state that DeBlasio

stated that “Our initial customer leads and wins are showing that, not only does the platform

deliver, but that the VitalStream monetization solutions provide flexible and creative

opportunities that work well in today’s environment.” Fourth Amended Compl., ¶ 110.

Although DeBlasio specifically referred to Internap’s customer leads and wins, he also gave

investors the impression that Internap’s newly acquired CDN was stable, performed well,

and that Internap’s CDN customers were satisfied with the product. Yet, by this time, Werle

had already discussed with Buckel VitalStream’s “continued operational problems,” which

resulted in customer credits. Presumably, operational problems that result in customer

credits include outages and other service-related issues experienced by customers. CW4

stated that outages began occurring frequently by May 2007. Given the issues that were

identified by Werle and CW4, the court finds it false and misleading for DeBlasio to tell

investors the “platform delivers” on May 3, 2007. Although Plaintiffs point to problems

Internap encountered throughout the integration process, Plaintiffs have not taken issue with

DeBlasio’s assertion here regarding Internap’s increase in customers. The court does not

find it false and misleading for DeBlasio to state that the “platform delivers” based upon

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Internap’s “initial customer leads and wins,” because Plaintiffs have not argued that the

basis for his statement; the customer increases, was false and misleading.

Second, Plaintiffs allege that DeBlasio’s statement that “We are very pleased that our

teams around the world are working together efficiently and are now fully trained” was false

and misleading. Fourth Amended Compl., ¶¶ 110, 113. Plaintiffs contend that Internap’s

teams were not working together efficiently. Instead, VitalStream personnel were laid off,

leaving only Internap employees who, according to CW6, 9 did not understand VitalStream’s

methods and who, according to CW2, 10 did not understand CDN.

Defendants respond that Plaintiffs have not pled this claim with particularity because

they do not allege with detail that Internap’s teams around the world were not working

together efficiently or that they were not trained. Defendants also contend that there are no

particularized facts regarding how this information was material. Defendants further argue

that the contested statement was an immaterial statement of corporate optimism.

The court finds the confidential witness statements relied upon by Plaintiffs here are

not sufficiently particularized to allege that Internap’s teams around the world were not

9 CW6 worked for VitalStream beginning in March 2000 and then joined Internap,

where he worked until January 2008 as a manager for major accounts. Fourth Amended

Compl., ¶ 38.

10 CW2 worked for VitalStream and then joined Internap, where he worked until late

February 2008 as a CDN Sales Manager. Id. ¶ 34.

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working together efficiently and were not fully trained. The confidential witnesses speak in

general terms about Internap employees who did not understand VitalStream’s methods and

did not understand CDN, but offer no corresponding time frame for these allegations. It may

be that immediately after the acquisition, in February of 2007, the Internap employees did

not understand VitalStream or CDN, but that by May they were brought up to speed. The

complete absence of any reference to a specific time period prevents the court from

determining whether DeBlasio’s statement was false at the time it was made. Further,

DeBlasio’s statement refers to Internap’s employees “around the world.” It is highly

doubtful that two confidential witnesses in relatively low-level positions could speak to the

efficiency of Internap’s teams around the world.

Third, Plaintiffs claim that DeBlasio’s statements that “we have scrubbed the

VitalStream operations to meet our business standards” and “[t]here is no question that we

are gaining momentum in CDN” were false and misleading. Plaintiffs rely on confidential

witnesses to support their assertion. According to Plaintiffs, CW22 11 told DeBlasio in a

December 2007 letter that the CDN was “catching fire on a daily basis.” Id. ¶ 114. CW19 12

stated that the CDN was “junk” and CW22 stated that the VitalStream systems were poor

11 CW22 was a Senior Software Engineer at Internap and worked at the company

from 2002 until July 2010. Fourth Amended Compl., ¶ 54.

12 CW19 worked at Internap from 2001 until July 2007 as the Senior Vice President

of Global Sales and was responsible for Internap’s worldwide sales and marketing efforts.

Fourth Amended Compl., Id. ¶ 51.

AO 72A (Rev.8/82)

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when they were acquired and were not stabilized until 2009 when Internap brought in new

engineering personnel to reverse engineer all the systems. Id. A number of witnesses also

stated that customers were increasingly complaining about Internap’s CDN, and Plaintiffs

contend that the only momentum being generated was in the number of customer complaints

and requests for credits.

Defendants argue again that Plaintiffs have failed to plead this claim with

particularity. There are no particularized allegations tying the “problems” referenced in

CW22’s December 2007 letter to the “problems” occurring in May 2007. Nor do Plaintiffs

adequately allege why DeBlasio’s statement that Internap had “scrubbed the VitalStream

operations” was false and misleading by virtue of the fact that the VitalStream system

allegedly was “junk.” Defendants also argue that the statement is an immaterial statement

of corporate optimism and a protected forward-looking statement.

The court finds that DeBlasio’s statement that Internap had “scrubbed the

VitalStream operations to meet our business standards” was false and misleading at the time

it was made. The fact that Internap suffered from outages in August, September and October

of 2007 necessitating credits of $1-2 million, combined with CW22’s statements that

VitalStream systems were poor when acquired and were not stabilized until 2009, leads to

the inference that as of May 3, 2007, Internap had not scrubbed VitalStream’s operations to

meet its business standards. Internap prided itself on the stability and reliability of its

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network. It is therefore unlikely that at this time the VitalStream systems were “scrubbed”

to meet those standards, given the later outages and CW22’s statement.

Plaintiffs have not adequately alleged, however, that DeBlasio’s second statement

above, that “there is no question we are gaining momentum in CDN,” was false and

misleading at the time it was made. DeBlasio’s full statement was that “There is no question

that we are gaining momentum in CDN as evidenced by a significant pipeline of interest in

our offerings from both existing and new customers.” Defendants’ Mot. to Dismiss, Exh. 7,

at 4. DeBlasio was thus basing his statement on Internap’s announced customer increases.

As stated earlier, Plaintiffs have not alleged that DeBlasio’s statement on this date regarding

Internap’s those customer increases was false and misleading. It is not false and misleading

therefore to state that Internap was gaining momentum in the CDN market because DeBlasio

was basing that statement on those customer increases. Internap’s announcement that it had

added 106 net new customers, 54 of which were in the CDN unit.

Fourth, Plaintiffs allege the following statements by DeBlasio were false and

misleading: (1) “[w]ith CDN and monetization solutions integrated into our IP and

colocation portfolio . . . .”; and (2) “[o]ur CDN team was very productive during the quarter.

We integrated our online advertising services platform into our PNAP architecture, which

will improve performance, uptime and reliability for our advertising customers.” Fourth

Amended Compl., ¶ 115. Plaintiffs also allege Buckel’s statement that “Now that we have

AO 72A (Rev.8/82)

32


largely brought VitalStream’s financial and operational functions into our systems, we are

prepared to execute on a growth strategy for this unit” was false and misleading. Plaintiffs

argue that these statements were false and misleading for the same reasons provided above.

Plaintiffs refer back to Werle’s whistleblower complaint, the Mersch memo and numerous

statements of the confidential witnesses.

Defendants insist that Plaintiffs have engaged in the same type of puzzle pleading

that this court rejected in its previous order. Defendants argue that Plaintiffs fail to

adequately allege that the statements were false because, as noted above, Plaintiffs do not

allege with particularity that the online services platform was not migrated into the P-NAP

architecture or that the VitalStream problems had any impact on this migration. Defendants

also contend that Plaintiffs fail to plead facts with sufficient particularity regarding exactly

what problems were occurring at Internap at the time these statements were made that would

make them false and misleading. As to Buckel’s lone statement above, Defendants assert

that it is a forward-looking statement protected under the PSLRA’s safe harbor.

The court agrees with Defendants that Plaintiffs have not adequately alleged that

DeBlasio’s second statement above, referring to Internap’s online advertising services

platform, was false and misleading. As stated earlier, Plaintiffs have not pled any allegations

concerning this particular business unit or the CDN problems’ effect on this unit.

AO 72A (Rev.8/82)

33


DeBlasio’s first statement and Buckel’s statement, however, are both very similar to

the statement in the press release that Internap had made “significant progress in the

integration of VitalStream.” DeBlasio’s first statement suggests that VitalStream’s CDN unit

was successfully integrated into Internap. Buckel’s statement that Internap had “largely

brought VitalStream’s financial and operational functions into our systems . . . .” represents

that significant progress has been made in the integration of VitalStream into Internap. But

that state of affairs is belied by Werle’s whistleblower complaint and the Mersch memo

discussed therein. See supra, at 20-21. Plaintiffs have thus adequately alleged that these

statements were false and misleading.

Finally, Plaintiffs allege that one of DeBlasio’s statements during the question and

answer period at the end of the conference call was false and misleading:

Let me answer the first question that you had, with regard to the migration of

the traffic from one network to another. It’s running very smoothly. We had

been going through this integration from the time we announced the deal back

in October. So we have had complete collaboration, both teams and now the

one team, to work through this issue, and it’s going very smoothly in terms of

moving the traffic–the VitalStream traffic on the Internap network with the

Internap standards.

Fourth Amended Compl., ¶ 111. Plaintiffs contend that DeBlasio’s answer was false and

misleading for the same reasons given above in relation to Defendants’ other statements. In

addition, Plaintiffs argue that DeBlasio admitted the falsity of this statement in a conference

call a year later, on May 7, 2008, when he stated that “the CDN outages in the second half

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of 2007 . . . reflected integration challenges we experienced by moving traffic from the

legacy VitalStream systems to Internap platforms.” Id. ¶ 116.

Defendants respond that Plaintiffs conveniently omitted the last part of DeBlasio’s

statement: “And we are working through that, and now with the addition of our new Chief

Technical Officer, we’re able to knock down more of these technical issues than ever before,

and it’s really a positive for us that we’re seeing.” Defendants’ Mot. to Dismiss, at 20-21.

Defendants argue that, when read in context, this statement is not misleading because it

conveys the message that, aside from the technical issues they were working on, the

migration was going smoothly. Defendants reason that advising analysts and investors that

Internap was working on technical issues does not mislead them into thinking there are none.

Defendants also submit that Plaintiffs impermissibly rely on puzzle pleading when they

allege the statement was false and misleading for the same reasons provided earlier in the

Complaint.

Drawing all inferences in the light most favorable to the Plaintiffs, the court finds that

Plaintiffs have adequately alleged these statements were false and misleading when made.

Although Werle’s whistleblower complaint does not specifically discuss the migration of

traffic from one network to the other, Werle does mention VitalStream’s “continued

operational problems,” which resulted in customer credits. As stated earlier, operational

problems that result in customer credits presumably include outages and other service-

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related issues. CW4 also stated that outages of Internap’s CDN were occurring by May

2007. DeBlasio, in 2008, admitted that outages in the second half of 2007 were due to

problems Internap experienced migrating traffic from one network to the other. Given

Werle’s and CW4’s statements regarding VitalStream’s operational issues at this time and

the fact that Internap experienced outages in August, September and October due to

problems migrating traffic between the networks, the court finds that Defendants’ statements

that the migration of traffic was going “very smoothly” were false and misleading when

made on May 3, 2007.

b. Scienter

Plaintiffs argue their Complaint supports a strong inference of scienter as to the May

3, 2007, statements based on Werle’s whistleblower complaint and various statements of

their confidential witnesses. By May 3, 2007, Werle had discussed with Buckel all of the

problems he had discovered related to the VitalStream transaction and Mersch had sent a

memo to Buckel outlining adverse disclosures and discoveries related to the internal

controls, accounting and reporting practices and the financial and operational condition of

VitalStream. Plaintiffs’ witnesses had stated that the integration was not going well, while

others stated that VitalStream’s CDN service was inferior. According to Plaintiffs, “some

of these disclosures were made directly to Buckel.” Fourth Amended Compl., ¶ 117. As to

Defendant DeBlasio, “CW19 raised some of these VitalStream-related problems with

AO 72A (Rev.8/82)

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DeBlasio during February/March 2007 and given the governing structure of Internap,

including meetings among senior executives, the close proximity of their offices and the

importance of VitalStream, it is a reasonably strong inference that DeBlasio knew about

these issues.” Id.

Defendants respond that the Complaint contains no particularized facts explaining

how the VitalStream problems had any impact on Internap’s financials or on the integration.

Thus, according to Defendants, even if Buckel knew about the VitalStream problems,

Plaintiffs fail to plead facts supporting an inference that Buckel’s knowledge demonstrates

scienter as to statements made relating to the integration and Internap’s future plans.

Defendants also contend that there are no particularized allegations that DeBlasio was

informed of any of the alleged problems as of May 3, 2007. Consequently, no inference of

scienter can be imputed to him. Defendants also take issue with each of Plaintiffs’

confidential witnesses.

The court finds that Werle’s whistleblower complaint is sufficient to allege a strong

inference of scienter as to Buckel concerning the May 3, 2007, statements. In his complaint,

Werle states that Buckel was informed at the outset of his review and research on the

VitalStream acquisition and was “kept apprised on an almost daily basis through reports,

discussions (in person and via phone), frequent emails and written documents and

spreadsheets.” Werle Compl., at 3. During the week of March 28, 2007, Werle told Buckel

AO 72A (Rev.8/82)

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he was going to try to figure out how the integration plan “could have been so far off the

mark.” Id. On or about April 9, 2007, Werle states that Mersch sent Buckel a memo

outlining adverse disclosures and discoveries related to, among other things, the financial

and operational condition of VitalStream. On April 27, Werle sent Buckel an email

expressing his frustration over the “seemingly endless stream of accounting mistakes and

problems that continued to stem from the due diligence, integration planning, and the

integration team assigned to the acquisition.” Id. at 4. It is clear from Werle’s complaint that

Buckel was aware of all the problems Werle discovered and expressed frustration over.

Contrary to Defendants’ assertion that Plaintiffs fail to plead particularized

allegations explaining how the VitalStream problems impacted integration or Internap’s

financials, Werle’s complaint clearly indicates what impact the VitalStream problems had

on integration. After making numerous discoveries, Werle told Buckel he wanted to figure

out how the integration plan “could have been so far off the mark.” These problems caused

the integration to not go according to plan. Werle’s email on April 27 stated that the

accounting mistakes and problems continued to stem, in part, from the integration planning

and the integration team assigned to the acquisition. Furthermore, the operational and

financial problems occurring at VitalStream would necessarily make it more difficult for

Internap to integrate the company.

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AO 72A (Rev.8/82)


Plaintiffs are not so successful with DeBlasio. Plaintiffs state that “CW19 raised

some of these VitalStream-related problems with DeBlasio during February/March 2007.”

The court has no way of discerning which problems were communicated to DeBlasio such

that he would know his statements were false and/or misleading. Werle’s whistleblower

complaint sets out in detail all of the problems Werle related to Buckel, but Plaintiffs’

assertion that “some” VitalStream-related problems were communicated to DeBlasio tells

the court nothing of DeBlasio’s knowledge regarding the issues Werle raised with Buckel.

Plaintiffs’ motive and opportunity allegations 13 are also insufficient to raise a strong

inference of scienter as to DeBlasio. See Bryant v. Avado Brands, Inc. , 187 F.3d 1271, 1286-

87 (11th Cir. 1999). Thus, Plaintiffs fail to state a claim here as to Defendant DeBlasio. 14

13 Plaintiffs argue that “given the governing structure of Internap, including meetings

among senior executives, the close proximity of their offices and the importance of

VitalStream, it is a reasonably strong inference that DeBlasio knew about these issues.”

Fourth Amended Compl., ¶ 117.

14 Much later in their Complaint, Plaintiffs devote an entire section to additional

scienter allegations. These additional scienter allegations are not tied to any particular

allegedly false statements made by Defendants. Many of them are simply statements of

opinions by confidential witnesses. See, e.g. , ¶ 211 (“According to CW14, the acquisition of VitalStream was a big mistake. CW14 felt that the decision for the acquisition was likely

made by the Company’s board or top executives, and it was made to make the Company

‘look better’ but not necessarily perform better.”). Others generally allege “discussions”

regarding integration problems “during 2007.” See, e.g. , ¶ 205 (CW3 participated in

meetings and discussions with senior executives “during 2007.” ¶ 204 (CW2 stated that

senior management knew about certain problems because he had regular contact with

DeBlasio until about December 2007). The court finds that these additional scienter

allegations are unhelpful because they do not reveal anything about the Defendants’

knowledge at any given time and are alleged generally. In its previous order, the court noted

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4. July 31, 2007, Earnings Release and Conference Call

Plaintiffs allege the following statements from Internap’s July 31, 2007, press release

and conference call were false and misleading:

• Our second quarter results demonstrate that customers are responding

to Internap’s bundled sales strategy.

• During the quarter, we experienced strong demand across each of our

business units that resulted in robust new customer growth and

increased revenue from within our existing customer base.

• Our recently announced competitive win at QTS to provide value-added CDN and performance IP solutions to more than 350 of their

enterprise customers is a strong signal that Internap is poised to capture

additional opportunities in high-growth sectors of the market.

the same defect in Plaintiffs’ Third Amended Complaint. See Order, dated Sept. 15, 2010, D.E. [44], at 20-21.

In their response, Plaintiffs also argue that the importance of VitalStream’s CDN unit

as a “core function” of Internap further supports a strong inference of scienter. Although

Defendants touted the growth potential of Internap’s new CDN unit at various times, it

remained the smallest piece of Internap’s revenue mix. See Pl.’s Resp., at 49. Internap’s CDN unit accounted for less than ten percent of Internap’s revenues. See Defendants’ Mot. to Dismiss, Exh. 1, at 42. The case cited by Plaintiffs in support either deal with much more

vital operations and functions of a company or contain more particularized allegations

regarding the Defendants’ access to and knowledge of certain information. See Institutional Investors Group v. Avaya, Inc. , 564 F.3d 242, 271 (3rd Cir. 2009) (“In fact, Avaya’s

operating margin was viewed as so important to the health of the company (and its

attractiveness to investors) that its supposed ability to hold and grow this margin was

described as the ‘Avaya Story.’”); Plotkin v. IP Axess Inc. , 407 F.3d 690, 700 (5th Cir. 2005) (“IPaxess was a struggling company that announced to the public that it had reached

agreements with Lynxus and AGPI that would bring them multimillion dollar revenues,

which would amount to a thirty-fold increase from the revenues IPaxess reported in 1999.”).

AO 72A (Rev.8/82)

40


• Frost and Sullivan estimate that worldwide CDN market will increase

at a 31% compound annual growth rate from 2007 to 2013. I provided

guidance that our CDN unit will grow even faster than that.

• In summary, we had a very strong second quarter both operationally

and financially. And, these trends are even stronger for the remainder

of the year and into 2008. A key take away from this call for Internap

analysts and investors is that Internap is now positioned in the

marketplace as the Internet solutions provider.

• This means that our customers are buying more and more of our

services.

• Now that we have largely brought VitalStream’s financial and

operational function into our systems, we are prepared to execute on

a growth strategy for this unit.

Fourth Amended Compl., ¶¶ 121-24. Plaintiffs argue these statements were false and

misleading because Defendants failed to disclose the increasing problems and complaints

Internap was receiving from customers and because the integration was still a disaster.

Plaintiffs also allege several of Defendants’ responses during the question and answer

portion of the conference call were false and misleading. Responding to a question about the

growth rate of CDN, DeBlasio stated that “the growth rate there is higher than growth rates

in other parts of the business, and will continue to be the highest part of our growth rate as

we go forward into 2008.” Id. ¶ 123. In response to a question about whether VitalStream

would be accretive in 2007, DeBlasio said that the “VitalStream acquisition, based upon that

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guidance is accretive in year.” Id. Finally, in response to a question on the impact of outages

that took place at one of Internap’s partner sites in San Francisco, Deblasio referred to and

commented on an outage that occurred at a partner site earlier in July. Id. Plaintiffs argue

that DeBlasio’s statements and reference to only one outage were false and misleading

because they ignored the numerous outages Internap’s CDN customers were experiencing,

the credits they were demanding, and the build-up of days sales outstanding.

To support an inference of scienter, Plaintiffs rely again on Werle’s whistleblower

complaint, the Mersch memo, and various statements of confidential witnesses.

As the court noted in its previous order, Werle’s whistleblower complaint does not

give rise to a strong inference of scienter with respect to the issues that occurred after he was

dismissed from Internap. See Order, dated Sept. 15, 2010, D.E. [44], at 22. The allegedly

false and misleading omissions that Plaintiffs complain of here mostly relate to increasing

customer complaints and outages that were occurring at or around the time Defendants made

their statements on July 31, 2007. 15 Mr. Werle was dismissed from Internap on May 1, 2007,

approximately two months before these statements were made. Werle’s complaint, and the

Mersch memo discussed therein, therefore tell the court nothing about the ensuing events

15 One of Buckel’s statements relates to the integration of VitalStream’s financial and

operational functions. Werle’s complaint does not give rise to an inference of scienter with

respect to this statement either because the complaint tells the court nothing about

Defendants’ knowledge of the state of integration on or around July 31, 2007.

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or Defendants’ knowledge of those events. There is also no evidence that Werle or Mersch

knew of or communicated to Defendants regarding any events subsequent to April 2007.

Plaintiffs’ confidential witness allegations also fail. The fact that numerous witnesses

had stated that the integration was not going well and that the CDN service was inferior is

irrelevant to the scienter inquiry. CW4’s statement that outages of CDN were occurring by

May 2007 and Plaintiffs’ allegation that “some of these disclosures were made directly to

Buckel” do not tell the court anything specific about what the Defendants knew at the time

they made their July 31, 2007, statements. CW4’s statement that Internap’s Tim Sullivan,

Internap’s Chief Technology Officer, was sent to Internap’s California offices during June

or July 2007 to discuss problems relating to outages and system upgrades similarly does not

tell the court anything about Defendants’ knowledge of those outages and system upgrades.

The mere fact of Tim Sullivan’s visit to Internap’s California offices in June or July 2007

does not reveal the extent of the problems, the problems’ effect on revenue, or whether the

Defendants knew about the problems he was addressing at the time. The court also rejects

Plaintiffs’ reliance on CW19 and Plaintiffs’ motive and opportunity allegations for the same

reasons as above. See supra, at 30.

5. November 6, 2007, Earnings Release and Conference Call

Plaintiffs allege the following statements in Internap’s November 6, 2007, press

release and conference call were false and misleading:

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• Accelerated growth in core IP Services and continued strength in Data

Center and CDN Services drove the revenue increase.

• Addition of 149 net new customers to end the third quarter at a total of

3,552 customers.

• Our strategy of bundling Internap’s enterprise-class data center services with

our proprietary IP route optimization and content delivery products is gaining

momentum in the market.

• Our strategy of increasing data center capacity to drive Internap’s leading IP

transit and CDN business is delivering results.

• During Q3 we made several important announcements that demonstrate the

progress we have made in scaling and driving the perform[ance] of our CDN.

• We believe that the integration of the VitalStream assets is largely complete,

and by the end of 2007, we will be on a run rate to drive a much stronger

growth for this unit in 2008 and beyond.

• “So with regard to the comment I made about being one month behind in the

VitalStream integration.

• Right now the work is largely done and behind us. We are fully integrated and

now we are adding customers.

• Now the integration itself, to build the scale that we need, that we needed to

attract the customers that we have and to drive the kind of performance that

Internap is known for, you want to make sure you do it right, and that’s what

we did. It took a little longer, it took about an extra month. We did it right.

AO 72A (Rev.8/82)

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Plaintiffs allege these statements were false and misleading because Defendants did

not disclose the increasing problems experienced during integration and the customer

complaints that Internap was receiving.

To establish scienter, Plaintiffs rely on Werle’s whistblower complaint, the Mersch

memo discussed therein and the statements of confidential witnesses.

Defendants argue that the Werle complaint and Mersch memo do not support a strong

inference of scienter as to the November 6, 2007, statements because there are no detailed

allegations that Werle had knowledge of or information concerning the Fall 2007 outages

or the Internap billing and credit issues at that time. Werle was dismissed on May 1, 2007,

and thus his allegations cannot support an inference of scienter in the Fall of 2007.

The court agrees with Defendants. Werle’s complaint cannot give rise to a strong

inference of scienter with respect to issues that occurred after he left Internap on May 1,

2007, for the reasons stated above. Werle’s complaint relates to the state of the integration

in March and April 2007, but says nothing about Internap’s condition in November 2007.

Mersch’s memo suffers from the same defect, as it was sent on or about April 9, 2007.

As stated earlier, Plaintiffs also rely on the statements of several confidential

witnesses to support an inference of scienter with respect to the November 2007

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statements. 16 CW4 stated that outages of Internap’s CDN were occurring by May 2007.

CW4 also relates that Tim Sullivan, Internap’s Chief Technology Officer, was sent to the

company’s California offices during June or July 2007 to discuss problems with outages and

system upgrades. Plaintiffs state that “[s]ome of these disclosures were made directly to

Buckel, so there can be no dispute that he knew of these issues.” Fourth Amended Compl.,

¶ 134. CW19 raised some of these VitalStream-related problems with DeBlasio during

February and/or March of 2007. CW3, who was part of senior management, stated that

Buckel and DeBlasio knew about the problems involving Internap’s CDN, including the

integration problems, outages, and credits demanded, because senior executives had many

meetings and discussions about the problems during 2007, some of which CW3 attended.

CW3 added that Buckel even informed Internap’s Board of Directors of these problems.

The chief problem with Plaintiffs’ reliance on their confidential witnesses again is

that there is no way to tie any specific problem related by these confidential witnesses to the

November 6, 2007, statements made by certain defendants. As stated earlier, CW4’s

statement that outages were occurring by May 2007 does not tell the court anything about

16 The court already addressed one of Plaintiffs’ witnesses, CW1, in its previous

order. See Order, dated Sept. 15, 2010, D.E. [44], at 19-20. The court noted the deficiencies

with Plaintiffs’ reliance on CW1’s statements and Plaintiffs have not cured them in their

Fourth Amended Complaint. The only additional helpful information Plaintiffs supply is the

nature of the question. The court still does not know specifically what DeBlasio said or what

“Fall of 2007” means.

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the Defendants’ knowledge of those outages. Plaintiffs’ statement that “some of these

disclosures were made directly to Buckel” is not helpful because it fails to specify what

disclosures were made, and when they were made, to Buckel. CW19’s statement that he

raised “some of these VitalStream-related problems” with DeBlasio in February/March 2007

does not specify what problems he discussed with DeBlasio. CW19’s discussion is also far

removed from Defendants’ November statements. Tim Sullivan’s visit to Internap’s

California offices in June or July 2007 fails for the reasons stated above. Finally, CW3’s

statements also suffer from a specificity problem because CW3 only states that senior

executives had many meetings “during 2007.” The court has no way of knowing who

attended those meetings or when they took place. Thus, Plaintiffs’ allegations regarding the

November 6, 2007, statements fail to raise a strong inference of scienter.

6. DeBlasio’s December 18, 2007, Statement 17

Plaintiffs allege the following statements by DeBlasio in connection with Internap’s

announcement of a new service level agreement for its CDN services were false and

misleading:

Internap is changing the game in terms of CDN quality and reliability and by

doing so is setting a new standard for the industry . . . . The integration of our

CDN and Performance IP assets brings a new level of service to our current

17 Defendant Buckel resigned from Internap on November 20, 2007. The rest of the

allegedly false and misleading statements thus only apply to Defendants Internap and

DeBlasio.

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customer base, and we believe it will be of strong interest to new customers

around the globe. Internap’s strategy of bundling data center, performance IP

and CDN services, all backed by our 100% SLA, is a highly differentiated

strategy designed to drive customer satisfaction and profitable growth for our

company.

Specifically, Plaintiffs argue that DeBlasio’s statements regarding CDN quality and

reliability and the integration of Internap’s CDN were false and misleading because

DeBlasio failed to disclose the significant problems Internap had been experiencing in

integrating VitalStream and the corresponding impact on its business, as alleged earlier in

their Complaint. 18

Defendants respond that DeBlasio’s statements were not false because Plaintiffs do

not adequately allege that Internap did not put the new service level agreement in place for

CDN services after the announcement. Further, Defendants argue, the statements were not

misleading because DeBlasio was announcing a new service level for future services, not

18In support of their allegations regarding DeBlasio’s December 18, 2010 , statement,

Plaintiffs refer to paragraphs 93, 95-96, 98, 100 and 102 of their Complaint. Paragraphs 95,

96 and 98 deal with billing problems Internap faced after the acquisition, and are not

relevant to Internap’s announcement of its new service level agreement. Paragraphs 100 and

102 deal with Internap’s operational problems that resulted in outages and other service

problems for customers. These two potentially relevant paragraphs do not specify any dates

for when these problems occurred, however. Confidential witnesses give examples of the

problems faced but do not provide any time period. See, e.g. , Fourth Amended Compl., ¶

100 (“These problems . . . existed at the time of the VitalStream acquisition and began

increasingly adversely affecting customers during the year as Internap was integrating CDN

as part of its bundle of services.”). Paragraph 93 references a letter sent from CW22 to

DeBlasio in December 2007 in which CW22 complained about the CDN product’s

performance. CW22 also stated that integration with VitalStream did not occur until 2009.

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representing that there had been no problems in the past. Defendants also urge that

DeBlasio’s statements were immaterial statements of corporate optimism.

As Defendants point out, Plaintiffs do not allege that Internap failed to put the new

service level agreement into place. Plaintiffs thus do not allege that the statement was false.

Rather, Plaintiffs’ argument is that DeBlasio’s statement was misleading given the problems

Internap encountered throughout the integration process. The court does not find those

problems relevant, however, to the announcement of a new level of services going forward .

DeBlasio’s statement only concerns the benefits to existing and potential customers of

Internap’s newly announced 100% service level agreement, and does not suggest that there

had not been problems in the past. In fact, any outages that may have occurred previously

could have been the impetus for the new service level offering.

7. January 11, 2008, Letter to the SEC

On January 11, 2008, Internap responded to SEC questions regarding certain of

Internap’s prior filings. In its letter, Internap stated the following with regard to revenue

recognition:

For our revenue arrangements that include a service level guarantee, we

recognize revenue at the end of each month during which we provided

services. If our Network Operations Center detects problems with a

customer’s network that are within the scope of a contractual service level

guarantee, then we do not recognize revenue that month for the amount of any

service credits due to that customer. In other words, if we do not deliver our

guaranteed level of performance to a customer in a given month, we adjust

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revenue downward for that month to account for any service credit that we

owe to the customer.

Fourth Amended Compl., ¶ 151. As to CDN service revenue in particular, Internap

responded:

Revenue is recognized when the price is fixed or determinable, persuasive

evidence of an arrangement exists, the service is performed, and collectability

of the resulting receivable is reasonably assured. We derive revenue from the

sale of CDN services to customers under contracts that generally commit the

customer to a minimum monthly level of usage on a calendar month basis and

provide the rate at which the customer must pay for actual usage above the

monthly minimum. For these services, we recognize the monthly minimum

as revenue each month provided that an enforceable contract has been signed

by both parties, the service has been delivered to the customer, the fee for the

service is fixed or determinable and collection is reasonably assured. . . .

Id. ¶ 152. Plaintiffs argue that Internap’s response to the SEC was false and misleading.

Plaintiffs contend that, despite Internap’s statement that it did not recognize revenue for the

month in which service credits are due a customer, but instead adjusted revenue downward,

Internap was not following that procedure with regard to the massive amounts of credit

requests that existed. Plaintiffs insist that even if the company was following that policy, and

claiming that disputed amounts did not yet give rise to a credit, Internap failed to disclose

the amount of these credit requests to the market. Regarding the CDN unit in particular,

Plaintiffs claim that Defendants should have disclosed the requests for credits that came

from customers because of outages that occurred frequently during 2007.

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Defendants respond that Plaintiffs’ claim fails because they have not alleged with

particularity even one example in which Internap improperly recognized revenue for a

service credit that was due to a customer. Plaintiffs offer no allegations regarding the credits

requested, the credits issued, or how they were accounted for.

Plaintiffs’ allegation that Internap did not follow its stated policy is insufficient to

state a claim for relief. Plaintiffs do not provide any support for this contention. See Fourth

Amended Compl., ¶ 153. Furthermore, Defendants were responding to specific questions

from the SEC regarding Internap’s revenue recognition policy. Defendants did not have a

duty to go beyond the scope of the SEC’s questions and discuss the amount of credit

requests it had received in relation to outages that occurred the previous year.

8. February 28, 2008, Earnings Release and Conference Call

From the press release, Plaintiffs allege the following statements by DeBlasio were

false and misleading: “Internap had a strong 2007” and

Operationally, we entered the CDN business through our acquisition and

integration of VitalStream holdings, sharply increased our customer count and

significantly increased the scale of our business by expanding the global

capacity of our data centers and IP network. As we enter 2008, Internap’s

strategic position in fast-growing markets combined with our unique bundled

services approach positions the company for robust growth and increasing

levels of margin contribution as we continue our focus on highly profitable growth.

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Fourth Amended Compl., ¶ 156; Defendants’ Mot. to Dismiss, Exh. 3, at 8. Plaintiffs

characterize DeBlasio’s second and third statements as ones concerning the benefits of

entering the CDN business. Plaintiffs argue all three statements are deceptive because they

do not reveal all the problems associated with, and the consequences of, the VitalStream

acquisition.

Defendants respond that DeBlasio’s statement that “Internap had a strong 2007” was

not just puffing, but also true, because Internap did in fact have a strong 2007, even with the

later adjustments to CDN sales. Defendants also argue that there are no particularized

allegations that DeBlasio’s other statements regarding Internap’s business as a whole were

false or misleading.

The court agrees with Defendants. As noted earlier, Internap’s financials did in fact

improve throughout 2007, as evidenced by its Form 10-K/A filed with the SEC on April 30,

2008. See Defendants’ Mot. to Dismiss, Exh. 14, at 4 (Revenues, net income and earnings

per share all improved each quarter). Thus, Internap did have a “strong 2007” overall. The

rest of DeBlasio’s statements were not false or misleading either. DeBlasio states as a fact

that Internap entered the CDN business through its acquisition of VitalStream (which it did),

that Internap (as a company) sharply increased its customer count, and that Internap (as a

company) significantly increased its scale by expanding globally. Plaintiffs have not pled

specific allegations contradicting the latter two assertions regarding Internap’s business as

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a whole. Instead, Plaintiffs’ allegations solely concern the CDN business segment of

Internap, which represented the smallest piece of Internap’s revenue pie. See id. ¶ 130.

Plaintiffs allege the following statements by DeBlasio during the conference call

were false and misleading:

• Our strong customer growth and retention rates indicate that our

bundled services message is being received favorably in the market.

• We ended the fourth quarter with 259 net new customers for a total end

of year customer count of 3,811. During the fourth quarter, we added

a number of new customers . . . .

• Internap’s services are backed by the best customer service experience

in the industry . . . .

• The improvements we have made to the reliability and stability of our

network is solidifying our CDN revenue base.

• As we exit 2007, Internap is a stronger company than ever before and

that is a result of careful planning and a precise attention to details.

Fourth Amended Compl., ¶¶ 157, 162. Plaintiffs argue these statements were false and

misleading because they ignored the problems that had existed since VitalStream was

acquired, the outages that began in May 2007 and increased in August 2007, the several

hundred customers that had requested credits to their accounts, and the customers that

cancelled their service, as alleged earlier in the Complaint.

AO 72A (Rev.8/82)

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First, Defendants respond that many of the statements alleged to be false and

misleading are not limited to Internap’s CDN services segment, but refer its business as a

whole, and Plaintiffs have not alleged with particularity that Internap’s bundled services

were not being received favorably by the market. Second, Defendants contend that although

the customer count was off by an immaterial 22 customers, Plaintiffs do not present any

well-pled allegations supporting an inference that DeBlasio knew at this time that these

customers had requested credits and should not have been billed or knew that these

customers were improperly included in the customer counts. Third, although Plaintiffs allege

that Internap’s CDN segment suffered from problems, Defendants maintain that Plaintiffs

do not allege adequately that Internap failed to make improvements or that those

improvements did not increase the stability or reliability of the network. Finally, Defendants

argue that the above-quoted statements are either immaterial statements of corporate

optimism or protected forward-looking statements.

The court first finds that two of the above statements were immaterial as a matter of

law as statements of corporate optimism or puffery. DeBlasio’s statement that Internap’s

services are “backed by the best customer service in the industry” is typical corporate

puffery that no reasonable investor would rely on in making an investment decision. See In

re Ford Motor Co. Securities Litigation, 381 F.3d 563, 570 (6th Cir. 2004) (holding

immaterial as a matter of law statements such as “Ford has its best quality ever,” “Ford is

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a worldwide leader in automotive safety,” and “Ford’s greatest asset is the trust and

confidence . . . [it] has earned from . . . [its] customers.”). DeBlasio’s statement that “As we

exit 2007, Internap is a stronger company than ever before and that is a result of careful

planning and a precise attention to details,” is very similar to one of the statements this court

identified as corporate puffery in its previous order. See Order, dated Sept. 15, 2010, D.E.

[44], at 25-26 (“In summary, I can tell you that Internap is a stronger, more competitive

company and in a better position than in any time in our history.”).

The two statements regarding Internap’s customer growth and customer count relate

to Internap as a whole and not just to its CDN unit. Thus, the problems identified by

Plaintiffs in Internap’s CDN services, the smallest part of company’s revenue mix, are

insufficient to make DeBlasio’s statements regarding the entire company’s customer growth

and increases false and misleading. Moreover, Plaintiffs have not pled that Internap as a

company did not experience customer growth or that the company did not end the fourth

quarter with a net positive increase in customers.

Plaintiffs also claim that the financial results and customer increases published in the

press release, discussed in the conference call, and reiterated in a quote from DeBlasio

published in a newspaper article were false and misleading because, as Defendants

eventually admitted, they overstated revenues, profits and the customer count.

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Defendants respond that Plaintiffs fail to specify precisely which statements were

false and misleading. Defendants also argue that Plaintiffs’ claims here do not meet Rule

10b-5’s materiality requirement. The statement regarding Internap’s customer count was

made as to the company as a whole, not just CDN services. Internap’s April 3, 2008, 8-K

stated that 22 customers should not have been included in the fourth quarter 2007 customer

count, bringing total customers down from 3,811 to 3,789. Defendants contend that there

are no detailed allegations supporting the claim that these adjustments were material.

Further, Defendants submit that they “never stated that the previously disclosed numbers

were materially false. There were no restatements, and Internap stated in its 10-K that these

adjustments were not material to the consolidated financial statements for any of the affected

quarterly periods.” Defendants’ Mot. to Dismiss, at 41-42.

Plaintiffs fail to allege their claims here with particularity. In their Complaint,

Plaintiffs block quote from Defendants’ press release, conference call, and a newspaper

article, then simply allege that the financial results and customer increases reported therein

were false and misleading because they were overstated, as eventually admitted by

Defendants later in the year. Plaintiffs here do not tell the court how much each figure was

overstated by and describe why that number was material in relation to Internap’s financial

results as a whole. Although Plaintiffs reference certain other paragraphs in their Complaint,

it is not the court’s role to dig through Plaintiffs’ Complaint to find the relevant numbers,

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compare them, and figure out why or why not they are material. Furthermore, Defendants

point out that they only misstated Internap’s customer count by 22 customers, bringing the

total figure down from 3,811 to 3,789, representing an adjustment of about one half of one

percent. Such a misstatement is clearly immaterial as a matter of law.

9. April 3, 2008 Form 8-K

Plaintiffs allege statements made in Internap’s April 3, 2008, Form 8-K were false

and misleading. There, Internap stated that it had “substantially finalized integrating our

combined networks through technological improvements and systems integration with

operational stability achieved since November,” and that in the fourth quarter of 2007

“management increased the reliability and reach of the platform and solidified the CDN

customer base.” Fourth Amended Compl., ¶ 174. Plaintiffs argue these statements were false

and misleading “for the reasons set forth in paragraphs 146-150 above.” Id. Paragraphs 146

through 150 concern CW22’s letter to DeBlasio in December 2007 and CW22’s statements

that the systems were not integrated into 2009 and the CDN systems were not stabilized until

2009 either.

Defendants respond that these statements were immaterial statements of corporate

optimism.

CW22’s letter to DeBlasio in December 2007 alerted DeBlasio to the “gross

instability” of Internap’s CDN platform as of that date. Fourth Amended Compl., ¶ 146.

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CW22 related to DeBlasio that the “base CDN product line” was “catching fire on a daily

basis” and that “the systems we’re responsible for maintaining still require daily duct-tape

and Silly Putty patchwork.” Id. (emphasis added). This state of affairs is flatly contrary to

the April 3, 2008, statement that Internap had achieved operational stability since November

2007. CW22’s statements also contradict Internap’s statement that in the fourth quarter of

2007 “management had increased the reliability and reach of the platform.” Defendants

made specific representations about the stability and reliability of Internap’s CDN at

specific points in time . CW22’s letter belies those representations as to those points in time.

Thus, Plaintiffs have sufficiently alleged that statements in Internap’s April 3, 2008, Form

8-K were false and misleading.

To raise an inference of scienter, Plaintiffs reference CW22’s December 2007 letter

to DeBlasio. CW22 stated that he sent the letter directly to DeBlasio and Eric Suddith, the

Vice President of Human Resources at the time. Administrative personnel confirmed to

CW22 that DeBlasio did indeed receive the letter, and CW22 believes Steve Archer, the

Vice President of Operations at the time, also received a copy. Defendants do not appear to

dispute the fact that DeBlasio received the letter. Thus, the court finds that as of April 3,

2008, DeBlasio was aware of CW22’s statements in his December 2007 letter concerning

the “gross instability” of Internap’s CDN. As noted earlier, statements in CW22’s letter

contradict certain representations made by Internap in its April 3, 2008, Form 8-K. The court

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finds that Plaintiffs have pled allegations raising a strong inference of scienter as to

DeBlasio concerning the April 3, 2008, statements.

10. May 7, 2008, Conference Call

Plaintiffs block quote from a May 7, 2008, conference call and, without specifying

any particular statement, allege that, despite DeBlasio admitting that Internap experienced

outages in the second half of 2007 that resulted in customer credits and disconnects, he

continued to hide the fact that VitalStream was not worth what Internap paid for it and that

the CDN service was not as valuable as Defendants had held it out to be. Plaintiffs then

contend that DeBlasio’s statements that “these issues [are] squarely behind us” and “our

internal processes [have been] addressed and improved” were false because Internap had not

in fact addressed and improved those processes. Plaintiffs further argue DeBlasio’s

statement that “the integration of VitalStream [was] complete” was false because it was not

complete. In support, Plaintiffs reference CW22, who told DeBlasio in a December 2007

letter that problems persisted with the CDN platform and that the system was unstable.

CW22 also stated that integration was not achieved until 2009.

Defendants submit that Plaintiffs’ Complaint lacks allegations regarding which

statement was made misleading by DeBlasio’s failure to “admit” that VitalStream was not

worth what Internap paid for it. Defendants also argue that the statements about Internap’s

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integration being complete and the internal processes being addressed and improved were

immaterial statements of corporate optimism.

As to scienter, Plaintiffs argue Defendants had knowledge of the VitalStream

problems from the time of the acquisition. In this regard, Plaintiffs refer to Werle’s

statement in his whistleblower complaint that if Internap was subject to an impairment test,

goodwill could be impaired by as much as $50 million. Plaintiffs also contend that CW22’s

letter to DeBlasio in December 2007 regarding the CDN’s instability and problems raises

an inference of scienter as to the May 7, 2008, statements.

Defendants respond that the Werle complaint, Mersch memo, and confidential

witness allegations regarding VitalStream problems all relate to problems from over a year

earlier and have nothing to do with credits resulting from Fall 2007 outages. Regarding

CW22’s December 2007 letter, Defendants contend that the Complaint contains no

particularized allegations tying the letter to statements made in May 2008. Additionally,

there are no allegations that CW22 communicated with DeBlasio again after December

2007.

For the reasons stated earlier, the court finds that the Werle complaint and Mersch

memo cannot give rise to an inference of scienter as to statements made over a year later.

Confidential witness allegations about problems occurring at around the time of acquisition

fail for the same reason. CW22’s letter to DeBlasio in December 2007 alerted DeBlasio to

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the “gross instability” of Internap’s CDN platform as of that date. Fourth Amended Compl.,

¶ 146. The court has found that DeBlasio was aware of the specific issues raised in the letter

as of December 2007. But it is a greater leap to presume that five months later DeBlasio was

aware that Internap had not addressed the issues raised in CW22’s letter and discussed in

his statements. Moreover, DeBlasio, in his statements that “these issues are squarely behind

us” and that the “internal processes [have been] addressed and improved,” was referring

specifically to outages in the second half of 2007 and the flawed processes Internap had in

place to address customer credits and disconnects at that time. CW22’s letter does not

address Internap’s handling of customer credits and disconnects and does not mention

service outages. The court therefore finds that CW22’s letter is insufficient to raise an

inference of scienter as to DeBlasio’s statements on May 7, 2008, because it does not relate

to the specific content of DeBlasio’s statements. As to DeBlasio’s statement that the

integration was complete, there is no allegation that CW22 ever told DeBlasio that

integration was not complete as of May 7, 2008. CW22’s statement that he did not think

integration was complete until 2009 does not reveal anything about DeBlasio’s knowledge

at this time.

Finally, Plaintiffs maintain that Internap should have acknowledged that its account

receivables and days sales outstanding had been increasing and that credit requests in

material amounts still existed.

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Defendants respond that Internap’s accounts receivables and days sales outstanding

were disclosed in the company’s public filings, and Plaintiffs do not allege that those

disclosures were false or misleading. Further, because Plaintiffs fail to plead why these

alleged omissions were misleading, such allegations fail to state a claim under PSLRA.

The court finds that Plaintiffs’ conclusory argument here, without any information

relating to Internap’s account receivables, days sales outstanding and additional credit

requests, and the materiality of those figures, fails to plead a sufficiently particularized §

10(b) claim.

11. SEC Filings: First, Second and Third Quarter 2007 Forms 10-Q; 2007 Forms 10-K and 10-K/A; First Quarter 2008 10-Q

Plaintiffs assert that certain of Internap’s SEC filings in 2007 and 2008 were false and

misleading. In these filings, Internap reported goodwill of $190.9 million, of which $154.7

million was allocated to the CDN services segment in connection with the VitalStream

acquisition. Plaintiffs argue that Defendants overstated, and continued to overstate, the

amount of goodwill related to the VitalStream purchase because a large portion of that

goodwill was impaired by the various problems that existed at VitalStream. Plaintiffs

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contend that goodwill “should have been written off months earlier.” Fourth Amended

Compl., ¶ 188.

Defendants respond that Plaintiffs’ goodwill theory fails to state a claim. In support,

Defendants cite In re Mirant Corp. Securities Litigation, No. 02-cv-1467, 2009 WL 48188

(N.D. Ga. Jan. 7, 2009) (Story, J.) and In re Serologicals Securities Litigation , No. 00-cv-

1025, 2003 WL 24033694 (N.D. Ga. Feb. 20, 2003) (Pannell, J.). In Mirant, this court

discussed the particularity requirement in the context of a securities fraud claim based upon

an alleged failure to write down an asset. Id. at *22. In such circumstances,

the Complaint must provide detail as to why an impairment was required under then-existing accounting rules. Thus, in order to plead an adequately

particularized claim, the Complaint must, for example, detail how the results

of an impairment test were reported fraudulently in the company’s financial

disclosures, or how impairment testing should have been conducted and how

that testing would have necessarily required a recognition of impairment.

Id. Defendants argue that Internap followed the accounting rules for goodwill as dictated by

FAS 141 and FAS 142, and Plaintiffs fail to plead allegations that meet the requirements of

Mirant.

In their Response, Plaintiffs counter that (1) a complaint may state a claim for

securities fraud regardless of the existence of a GAAP violation; (2) statements relating to

goodwill valuation plead a claim for securities fraud where the overvaluation of goodwill

is part of a larger scheme to defraud, as here; and (3) a complaint states a claim where it

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alleges that a defendant violated its own policy for goodwill valuation as disclosed to

investors. Plaintiffs argue that Defendants violated their own policy for valuing goodwill.

In support of their contentions, Plaintiffs cite several decisions outside of this circuit.

Plaintiffs also insist that the case law cited by Defendants is distinguishable because Mirant

and Serologicals were grounded in accounting fraud.

The court finds Defendants’ case law more persuasive. Mirant is a decision of this

court and deals with the precise issue in dispute here. There, the plaintiffs alleged violations

of § 10(b) of the Exchange Act where the Defendants

overstated revenues, failed to account for an impairment of WPD from its

valuation at $561 million in the fourth quarter of 1999 to its eventual sale for

$235 million in September 2002, and failed to disclose material information

concerning Mirant’s misconduct during the summers of 2000 and 2001 in

California.

2009 WL 48188 at *6. Judge Story specifically addressed the particularity requirement for

a § 10(b) claim premised on the defendants’ failure to write-down an asset. Plaintiffs here

also allege § 10(b) violations based on the Defendants’ failure to write-down an asset.

Plaintiffs fail to meet the particularity requirements as stated in Mirant. In their

Complaint, Plaintiffs merely state that Defendants’ SEC filings were false and misleading

because they overstated goodwill, which was impaired by the various problems at

VitalStream. Plaintiffs do not provide “detail as to why an impairment test was required

under then-existing accounting rules,” nor do they “detail how the results of an impairment

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test were reported fraudulently in the company’s financial disclosures, or how impairment

testing should have been conducted and how that testing would have necessarily required

a recognition of impairment.” In re Mirant Corp., at *22.

The only potentially relevant evidence that Plaintiffs provide is Werle’s statement in

his whistleblower complaint that if the VitalStream deal was subject to an impairment test,

Internap “could be subject” to an impairment write-down. Werle Compl., at 5 (emphasis

added). There are thus two contingencies in Werle’s statement. He was unsure whether

Internap was subject to an impairment test under the accounting rules, and if it was, whether

Internap would be subject to a large impairment write-down. 19 Such allegations are far from

what this court required in Mirant.

B. Section 20(a) Claims

Section 20(a) of the Exchange Act provides that “every person who, directly or

indirectly, controls any person liable under any provision of this chapter or any rule or

regulation thereunder shall be liable jointly and severally with and to the same extent as such

controlled person.” 15 U.S.C. § 78t(a). Defendants’ only rebuttal to Plaintiffs’ § 20(a) claims

is that they fail because Plaintiffs have failed to state a claim under § 10(b). Based on the

statements in various press releases, conference calls and SEC filings, Plaintiffs have alleged

19 The court also notes that Werle was not a Certified Public Accountant and

acknowledged as much in his statements to Buckel. See Werle Compl., at 6.

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facts that would make § 20(a) applicable to Defendants Buckel and DeBlasio. Because the

court denies Defendants’ motion to dismiss as to some of the substantive securities fraud

claims, the motion to dismiss as to the § 20(a) claims premised on those claims is denied as

well.

[C. Summary of claims that can go forward and claims that are dismissed. ]

Plaintiffs’ claims may go forward against Defendants Internap and Buckel as to

the following May 3, 2007 statements: (1) Internap had made “significant progress in the

integration of VitalStream,” (2) Internap’s CDN “platform deliver[s],” (3) “we have

scrubbed the VitalStream operations to meet our business standards,” (4) “With CDN

and monetization solutions integrated into our IP and colocation portfolio . . . .” (5)

“Now that we have largely brought VitalStream’s financial and operational functions

into our systems . . . .” and (6) statements that the migration of traffic from one network

to another was going “very smoothly.” Plaintiffs’ claims may go forward against

Defendants Internap and DeBlasio as to Internap’s April 3, 2008 Form 8-K. The court

grants Defendants’ motion to dismiss as to the rest of Plaintiffs’ claims.

III. Conclusion

Defendants’ motion to dismiss is GRANTED IN PART and DENIED IN PART.

Defendants are directed to answer Plaintiffs’ Fourth Amended Complaint within the time

limits set forth in the Federal Rules of Civil Procedure.

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IT IS SO ORDERED this 30th day of September, 2011.

/s/ J. Owen Forrester

J. OWEN FORRESTER

SENIOR UNITED STATES DISTRICT JUDGE

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