In an opinion today, Judge Cote determined to sanction, in an amount to be determined later, a law firm that brought a class action alleging that AOL repurchased its stock at artificially depressed prices because it knew that it would later sell a portfolio of patents to Microsoft for over $1 billion, thereby boosting AOL’s stock price. The patents were sold at an auction, but the plaintiffs alleged that the auction was essentially a sham because Microsoft was the predetermined winner. A critical allegation in the complaint was that AOL’s Tim Armstrong called Microsoft’s Steve Ballmer long before the auction to “close the deal.” Judge Cote found the allegation entirely unsupported and rejected counsel’s attempt to minimize it:
[P]laintiff’s counsel contends that the use of the phrase to “close the deal” was only intended to convey that the call to Ballmer was made “to bring the plan into fruition,” that is, a plan to monetize AOL’s patent portfolio. Plaintiff’s counsel admits that this was “perhaps a broad interpretation” . . . but one that fell within the bounds of vigorous advocacy. Counsel also asserts that his pleading was not actually that the auction was a sham: “It is not strictly what Plaintiff was arguing.” Counsel explains that they were only seeking to allege that AOL designed an auction process to favor Microsoft and its superior knowledge of the patent portfolio. Neither of these arguments has merit. This interpretation of the phrase “close the deal” is belied by both the overall theory and particular language of the Amended Complaint, the thrust of which is unmistakably that AOL and Microsoft reached a deal that AOL kept secret in order to repurchase its stock at an artificially deflated price and later covered up with a sham auction. Indeed, the Amended Complaint alleges that “AOL had already committed to a plan to sell its Patent Portfolio to Microsoft, and was actively bringing to fruition the sale in secret, while benefitting from the artificially low price of AOL stock.” The Amended Complaint elsewhere alleges that “defendants had already committed to a plan to sell AOL’s valuable Patent Portfolio and had selected Microsoft as purchaser” and that “Armstrong had called [Ballmer] to close out Microsoft’s long-anticipated plan to acquire the Patent Portfolio.” (Emphasis added). These allegations appear throughout the Amended Complaint in similar language. It is not possible to square the allegations that the purpose of the call was to “close out” Microsoft’s plan to acquire the patents, or that Microsoft was the “inevitable purchaser,” or that defendants “had selected Microsoft as purchaser,” with counsel’s current insistence that the Amended Complaint was “not about an undisclosed deal” but rather only “an undisclosed expectation.” The secret deal theory, including the allegation concerning the telephone call, was plainly at the heart of the plaintiff’s case, and the recent submissions by counsel demonstrate that this theory was “utterly lacking in support.” Kiobel, 592 F.3d at 81. Notably, counsel has not cited any evidence that this telephone call even occurred in the fall, let alone that it resulted in a secret determination that Microsoft would purchase the patents.