Case 1:11-cv20549KMW Document 47 Entered on FLSD Docket...

Case 1:11-cv20549KMW Document 47 Entered on FLSD Docket 05/02/2011 of 35

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA

MIAMI-DADE DIVISION

SID MURDESHWAR,

Plaintiff,

Case No. 1:1 1-cv-20549-UU

SEARCHMEDIA HOLDINGS LIMITED etal.,

Defendants.

MOTION TO DISMISS AMENDED COMPLAINT BY DEFENDANTS SEARCHMEDIA HOLDINGS LIMITED, PHILLIP FROST, ROBERT FRIED, RAO UPPALURI, STEVEN RUBIN, GLENN HALPRYN,

THOMAS BEIER, DAVID MOSKOWITZ, AND SHAWN GOLD

Tracy A. Nichols, Esq. Louise McAlpin, Esq. Stephen P. Warren, Esq. HOLLAND & KNIGHT LLP 701 Brickell Ave., Suite 3000 Miami, FL 33131

Attorneys for Defendants SearchMedia Holdings Limited, Robert Fried, Phillip Frost, Rao Uppaluri, Steven Rubin, Glenn Halpryn, Thomas Beier, David Moskowitz, and Shawn Gold


TABLE OF CONTENTS

INTRODUCTION

1

STATEMENT OF FACTS

2

PROCEDURAL HISTORY

7

ARGUMENT

8

1. PLAINTIFFS HAVE FAILED TO STATE A CLAIM FOR SECURITIES FRAUD AGAINST SEARCHMEDIA OR THE IDEATION DEFENDANTS UNDER SECTION 10(b) OF THE EXCHANGE ACT . ................................................................... 8

A. The Amended Complaint Does Not Plead Particular Facts Giving Rise to a Strong Inference that the Ideation Defendants Acted with Scienter........................9

B. Plaintiffs Have Failed to Plead Facts Giving Rise to a Strong Inference that SearchMedia Had Scienter.....................................................................................15

C. The Amended Complaint Fails to Attribute the Pre- and Post-Merger Statements to the Ideation Director Defendants . ................................................... 16

II. THE AMENDED COMPLAINT FAILS TO STATE A SECTION 14(a) CLAIM AGAINST THE IDEATION DEFENDANTS OR SEARCHMEDIA. ............................ 20

A. Plaintiffs Have Not Sufficiently Pled that the Opinions Underlying the Section 14(a) Claim Were Subjectively False . ...................................................... 22

B. The Ideation Defendants Were Not Negligent in Failing to Uncover the Accounting Improprieties at SMIL Prior to the Merger . ....................................... 23

III. THE AMENDED COMPLAINT FAILS TO ADEQUATELY ALLEGE A CLAIM FOR "CONTROL PERSON" LIABILITY . ...................................................................... 27

CONCLUSION..............................................................................................................................28


TABLE OF AUTHORITIES

Page(s) CASES

Brown v. Enstar Group, Inc., 84 F.3d 393 (11th Cir. 1996)

Bruhl v. Conroy, No. 03-23044-Civ, 2007 WL 983228 (S.D. Fla. Mar. 27, 2007)

Bryant v. Avado Brands, Inc., 187 F.3d 1271 (llthCir. 1999) ................................................................................

California Pub. Employees'Ret. Sys. v. Chubb Corp., CIV. NO. 00-4285(GEB), 2002 WL 33934282 (D.N.J. June 26, 2002) ..................

Desaigoudar v. Meyercord, 223 F.3d 1020 (9th Cir. 2000)

Durgin v. Mon, 659 F. Supp. 2d 1240 (S.D. Fla. 2009)

Fisher v. Kansas, 467 F. Supp. 2d 275 (E.D.N.Y. 2006) ......................................................................

Gaines v. Guidant Corp., 1:03CV00892-SEB-WTL, 2004 WL 2538374 (S.D. Ind. Nov. 8, 2004) .................

Gould v. Am. Hawaiian S.S. Co., 351 F. Supp. 853 (D. Del. 1972)...................................................................

Harris v. IVAX Corp., 182 F.3d 799 (11th Cir. 1999) ......................................................................

Hayes v. Crown Central Petroleum Corp., 78 Fed Appx. 857 (4th Cir. 2003).................................................................

Hubbard v. BankAtlantic Bancorp, Inc., 625 F. Supp. 2d 1267 (S.D. Fla. 2008) .........................................................

In re Bank ofAmerica Corp. Sec., Deny, and ERISA Litig., No. 09 MD 2058 (PKC), 2010 WL 3448194 (S.D.N.Y. Aug. 27, 2010) .....

28

17.18

3,8

12

20

18,19

.20, 22

11

24, 26, 27

20

.20, 22

3,27

22

In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405 (S.D.N.Y. 2007), affd sub nom. S. Cherry St., LLC v. Hennessee Group LLC, 573 F. 3d 98 (2d Cir. 2009) ..................................................................................11

11


In re Eagle Building Tech., Inc. Sec. Litig., 319 F. Supp. 2d 1318 (S.D. Fla. 2004).

In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (ND. Cal. 2000) ........................................................

In re Nokia Corp. Sec. Litig., 1998 U.S. Dist. LEXIS 4100 (S.D.N.Y. Mar. 31, 1998) ..............................

In re Pegasus Wireless Corp. Sec. Litig., 657 F. Supp. 2d 1320 (S.D. Fla. 2009) .................................

In re Sensormatic Elecs. Corp. Sec. Litig., No. 018346, 2002 WL 1352427 (S.D. Fla. June 10, 2002)..

In re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308 (M.D. Fla. 2002) ................................

In re Technical Chem. Sec. Litig., 2001 WL 543769 (S.D. Fla. Mar. 20, 2001).........................

In re Textainer Partnership Sec. Litig., 2005 WL 3801596 (ND. Cal. Feb. 17, 2006)

In re Tibco Software, Inc. Sec. Litig., No. C-05-2146-SBA, 2006 WL 1469654 (ND. Cal. May 25, 2006)

In re Verisign, Inc. Deny. Litig., 531 F. Supp. 2d 1173 (ND. Cal. 2007)

12

12, 22, 24, 25

11

17, 18, 19

17

14

19

22

10

.20, 27

Knollenberg v. Harmonic, Inc., 152 Fed. Appx. 674 (9th Cir. 2005)..........................................................................

Mathews v. Centex Telemanagement, Inc., No. C-92-1837-CAL, 1994 WL 269734 (ND. Cal. June 8, 1994) ..........................

Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008)

Plumbers & Pipe/Itters Local Union 719 Pension Fund v. Zimmer-Holdings, Inc., 1:08-CV-01041-SEB-DM, 2011 WL338865 (S.D. Ind. Jan. 28, 2011) ..................

Podany v. Robertson Stephens, Inc., 318 F. Supp. 2d 146 (S.D.N.Y. 2004).

Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003)

20

10

passim

11

23

14

iii


Roth v. OfficeMax, Inc., 527 F. Supp. 2d791 (ND. Ill. 2007) .......................................................................................12

Rudolph v. Utstarcom, 560 F. Supp. 2d 880 (N.D. Cal. 2008) .....................................................................................27

Schultz v. Applica Inc., 488 F. Supp. 2d 1219 (S.D. Fla. 2007) ....................................................................................16

Shidler v. All American Life & Fin. Corp., 775 F. 2d. 917 (8th Cir. 1985) .....................................................................................20, 24, 27

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)...................................................................................................................9

Theoharous v. Long, 256 F.3d 1219 (11th Cir. 200 1) ...............................................................................................28

Trans World Corp v. Odyssey Partners, 561 F. Supp. 1315 (S.D.N.Y. 1983).........................................................................................24

STATUTES

15 U.S.C. §78t(a) ..........................................................................................................................27

15 U.S.C. §78u-4(b)(1) ...................................................................................................................8

15 U.S.C. §78u-4(b)(2) ...................................................................................................................8

OTHER AUTHORITIES

Daniel S. Floyd et al., Securities Litigation (2011) .......................................................................15

Rule14a-9 ......................................................................................................................................20

lv


INDEX OF EXHIBITS

Document

Ideation Form S-1/A

Exhibit 99.1 to Ideation Form 8-K

Ideation Form 8-K

Ideation Form 424133

P. Frost Form 4

SearchMedia Form 8-K

P. Frost Form 4

Exh. 99.1 to SearchMedia Form 8-K

SearchMedia Form 6-K

SearchMedia Form 10-Q

P. Frost Form 4

R. Uppaluri Form 4

S. Rubin Form 4

R. Fried Form 4

P. Frost Form 4

Date Filed with Securities and

Exchange Commission

Nov. 1, 2007

Apr. 1, 2009

Apr. 6, 2009

Oct. 5, 2009

Jan. 8, 2010

Jan. 6, 2010

Jan. 26, 2010

Feb. 3, 2010

Nov. 16, 2010

Dec. 16, 2010

Feb. 1, 2010

Nov. 28, 2007

Nov. 28, 2007

Nov. 28, 2007

Nov. 28, 2007

Exhibit No.

A

B

C

D

E

F

U

H

I

J

K

L

M

N

0

v


MOTION TO DISMISS

Pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the

Private Securities Litigation Reform Act of 1995 ("PSLRA"), Defendants SearchMedia Holdings

Limited, Robert Fried, Phillip Frost, Rao Uppaluri, Steven Rubin, Glenn Halpryn, Thomas Beier,

David Moskowitz and Shawn Gold move to dismiss the Amended Complaint. [D.E. 4 .]

MEMORANDUM OF LAW

Introduction

In 2009, Ideation Acquisition Corp. ("Ideation") acquired SearchMedia International

Limited ("SMIL"), a Chinese media company (the "Merger"). The combined company changed

its name to SearchMedia Holdings Limited ("SearchMedia"). After the Merger, SearchMedia's

new management and the Ideation directors who stayed on the board of the surviving company

discovered that the prior owners at SMIL had substantially inflated the financial results that

Ideation and its shareholders relied on in deciding to buy the Chinese company. Over a ten-

month period in 2010, SearchMedia brought in new officers to run the company, conducted an

internal review, publicly disclosed the findings to investors and the Securities and Exchange

Commission ("SEC"), restated SMIL's financial statements, implemented remedial measures,

and commenced legal proceedings against SMIL's management.

In this case, Plaintiffs have sued not only the SMIL wrongdoers but also the other

victims—Ideation's former management and SearchMedia—under Section 14(a) of the Securities

Exchange Act for alleged misstatements in the proxy seeking approval of the Merger and under

Section 10(b) of the Securities Exchange Act for allegedly-false statements made before and

after the Merger. Plaintiffs plead no facts nor plausible theory to explain why any rational

person muchless successful entrepreneurs who committed substantial resources to this

transaction, made nothing and lost substantial amounts when they announced the accounting

1


problems wouldintentionally enter into a transaction and knowingly overpay for a company

whose audited revenues turned out to be woefully overstated. As such, the claims asserted

against the Ideation Defendants and SearchMedia should be dismissed.

Statement of Facts

Ideation was formed in 2007 by a group of experienced business executives, including

Dr. Phillip Frost, a successful entrepreneur with extensive experience building companies such

as IVAX Corp. and, Robert Fried, a digital media entrepreneur and accomplished motion picture

producer with many years of experience founding and operating traditional and digital media

companies. (Am. Compl. ¶J 1, 4.) They were joined by Rao Uppaluri, Steven Rubin, Thomas

Beier, Shawn Gold, Glenn Halpryn, and David Moskowitz. Id. ¶ 4. Together, this group is

referred to as the Ideation Defendants.

Ideation was a Special Purpose Acquisition Company formed for the purpose of

acquiring or merging with one or more businesses. Id. ¶ 2. In connection with the formation of

Ideation, certain of the Ideation Defendants and their affiliates bought $2.4 million of Ideation

common stock and warrants in a November 2007 private placement. (Am. Compl. ¶ 4.) The

common stock issued to Ideation's management in the private placement was placed into escrow

and could not be released until one year after a business combination was completed. See Exh.

A at 12.1 The warrants were similarly held in escrow until 90 days following a business

combination. Id. at 76. To fund the business combination, Ideation conducted an initial public

offering ("IPO") of its stock and warrants in November 2007 that raised gross proceeds of $80

1 Although Ideation's registration statement is not cited or quoted in the Amended Complaint, the Court may take judicial notice of SEC filings and consider them in ruling on this motion to dismiss. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1278 (11th Cir. 1999); Hubbard v. BankAtlantic Bancorp, Inc., 625 F. Supp. 2d 1267, 1279 (S.D. Fla. 2008). All of the exhibits attached to this Motion were filed with the SEC.

2


million. (Am. Compl. ¶ 2.) Certain of the Ideation Defendants and their affiliates purchased

$1.25 million of securities in the IPO. See Exhs. L-O. Ideation advised that it would only

acquire a business with audited financial statements and a fair market value that was at least

equal to 80% of Ideation's net assets. (Am. Compl. ¶ 3.a.)

Following the IPO, Ideation's management began evaluating prospective businesses.

Ideation ultimately identified a total of 122 companies for potential consideration. In the fall of

2008, Ideation began exploring opportunities in China and engaged Oppenheimer & Co. as its

financial advisor. See Exh. Dat 100-01.

SearchMedia International Limited

In November 2008, Ideation learned about a company named SMIL. Formed in 2005,

SMIL was a privately-held media company that was purported to be one of the largest integrated

operators of outdoor billboard and in-elevator advertising networks in China. (Am. Compl. ¶ 5.)

SMIL's largest shareholder was the global financial services company Deutsche Bank AG.,

which had made a substantial investment in an August 2007 private placement of SMIL's stock.

See Exh. Dat 164, 231.

Between November 2008 and April 2009, Ideation's management, its financial advisor,

and its legal advisors in the U.S. and China participated in numerous discussions and meetings

with SMIL's board of directors and management, traveled to SMIL's headquarters, reviewed

SMIL's diligence items, toured SMIL's facilities and media locations in China, interviewed

clients of SMIL, and negotiated the terms of a potential acquisition. Id. at 101-04. In March

2009, Ideation retained BDO China Shu Lun Pan Certified Public Accountant to review the

finances and internal controls of SMIL's largest subsidiaries. Id. at 104. Later that month,

Ideation's board of directors voted unanimously to approve a business combination with SMIL.

Id.

3

Case 1:11cv-20549KMW Document 47 Entered on FLSD Docket 05/02/2011 of 35

In April 2009, Ideation announced that it had agreed to merge with SMIL. If the Merger

was approved by Ideation's stockholders, Ideation would be renamed SearchMedia and SMIL's

shareholders would receive approximately 44% ownership in the surviving entity. (Am. Compl.

¶ 5.) Ideation explained that SMIL's existing China-based management team would remain in

place. Ideation also disclosed that The Frost Group, LLC, a private investment firm in which

Frost, Uppaluri and Rubin are members, had committed to purchase up to $18.25 million of

Ideation shares to support the Merger and ensure a minimum level of cash after closing. See

Exh. D at 4.

Ideation Mails Proxy to Shareholders

On October 5, 2009, Ideation mailed a definitive proxy statement/prospectus ("Proxy") to

its shareholders. The Proxy included SMIL's historical financial statements for 2007 and 2008,

which had been audited by the independent accounting firm of KPMG. See Exh. D at F-36-79.

KPMG opined that SMIL's financial statements presented fairly in all material respects the

financial condition of SMIL in accordance with accounting principles generally accepted in the

United States of America ("U.S. GAAP"). Id. at F-36.

The Proxy explained that Ideation's board of directors had determined that SMIL satisfied

the 80% fair market value requirement. Id. at 115. Based on a variety of analyses, including

comparisons to three companies in the outdoor advertising industry that were directly

comparable to SMIL, Ideation's board derived a minimum equity valuation of $176.7 million for

SMIL. Id. That valuation substantially exceeded the $60.9 million value that was required to

satisfy the 80% test. Id.

4


Ideation Warned About Certain Merger Risks

Although Ideation's board of directors had voted in favor of merging with SMIL, it

recognized that the Merger was not without risk. The Proxy contained no fewer than sixty-one

"Risk Factors." Id. at 37-63. One of the risk factors related to SMIL's failure to maintain

internal controls. The Proxy disclosed that KPMG had previously found deficiencies in SMIL's

internal control procedures which, in the judgment of KPMG, adversely affected SMIL's ability

to initiate, authorize, record, process and report financial data reliably in accordance with GAAP

such that there was more than a remote likelihood that a misstatement of its financial statements

that was more than inconsequential would not be prevented or detected. The Proxy explained

that although SMIL had undertaken remedial steps to correct these control deficiencies, the

"implementation of these measures may not fully address these control deficiencies, and to date

these control deficiencies have not been remedied." Id. at 39.

Ideation also warned that SMIL had rapidly acquired a large number of companies that

had various degrees of, and frequently lacked, systems and controls. Id. at 37. Ideation

explained that if measures to integrate the acquired companies were not successful, SMIL had

"limited ability to detect and prevent material inaccuracies, misstatements or even fraud at the

acquired businesses." Id. Ideation also warned that "[although SearchMedia has conducted due

diligence with respect to its acquisitions, it may not have implemented sufficient due diligence

procedures and may not be aware of all of the risks and liabilities associated with such

acquisitions." Id. at 38.

Shareholders Approve the Merger

On October 27, 2009, Ideation's shareholders approved the Merger. As planned, Ideation

changed its name to SearchMedia. Certain members of Ideation's board of directors remained in

place following the acquisition, while others did not. Defendants Fried, Rubin, and Halpryn

5


became non-employee, outside directors of SearchMedia. Defendants Frost, Uppaluri, Beier,

Gold, and Moskowitz resigned their positions. No member of Ideation's management or board

assumed any managerial, officer or employee role in SearchMedia. (Am. Compl. ¶J 27-34.)

In December 2009, SearchMedia's board of directors authorized a stock and warrant

repurchase program through which the Company repurchased $3.8 million in warrants in January

2010. See Exh. J at 16. Additionally, one member of The Frost Group bought 50,000 shares of

SearchMedia common stock in the open market in January 2010. See Exhs. E, G, K.

Over the next several months, SearchMedia made several changes to its management

team. In January 2010, the Company brought in Wilfred Chow, who had nearly 20 years of

experience in financial markets in China, as the Chief Financial Officer. See Exh. F. The

following month, the Company appointed Paul Conway, who had previously served as Managing

Director of Media Investment Banking at Oppenheimer & Co., as SearchMedia's Chief

Executive Officer. See Exh. H.

SearchMedia Delays Filing of Annual Report and Begins to Discover Items Leading to Restatement

In March 2010, SearchMedia announced that it would delay the filing of its annual report

because its review of the 2009 financial results was "taking longer than anticipated as the

Company is assessing the materiality of certain uncollectible accounts receivable related to sales

generated primarily in the in-elevator business, which the Company believes will likely result in

significant adjustments from previously disclosed estimated financial results for 2009." (Am.

Compl. ¶ 73.) The Company also disclosed that that it was discussing appropriate remedies with

several of the original SMIL shareholders including cancellation of shares they received in the

Merger. Id.

6


In April 2010, the Company provided an update on its internal accounting review and

released preliminary unaudited financial results for 2009. Id. ¶ 76. It explained that following

the Merger, the Company had discovered "operational and other issues" in the in-elevator

division and that it had responded by bringing in new senior management" (i.e., Conway and

Chow). Id. The Company further disclosed that, as a result of the Company's investigation, it

appeared the Company would reverse approximately $16 to $18 million of revenue previously

reported for the first nine months of 2009. Id

In August 2010, SearchMedia disclosed that the impact of the accounting issues had

expanded and that, as a result of its ongoing investigation, the Company would restate SMIL's

financial statements for 2007 and 2008. Id ¶ 80. The Company disclosed that it estimated that

SMIL had overstated its revenue in 2007 and 2008 by approximately $6 million and $25 million,

respectively. Id. The Company further stated that it was continuing to pursue legal remedies

against former SMIL owners, including cancellation of their shares acquired in the Merger. Id.

In November 2010, SearchMedia filed its annual report for 2009 and restated SMIL's

financial statement for 2008. Id. ¶ 90. Notably, the restatement pertained entirely to accounting

issues that pre-dated the Merger. A short time later, the Company announced that it had

"commenced claims against the former shareholders and directors of [SMIL] for breaches of

representations, warranties and covenants contained in the [Merger's] Share Exchange

Agreement." Exh. I.

Procedural History

This lawsuit was commenced in September 2010 as a proposed class action for two

purported subclasses: (a) those who purchased SearchMedia (formerly Ideation) securities

between April 1, 2009 and August 20, 2010; and (b) those who held Ideation common stock on

October 2, 2009 and were eligible to vote at Ideation's shareholder meeting on October 27, 2009.

7


(Am. Compi. ¶ 1)2 The Amended Complaint asserts claims under Sections 10(b), 14(a), and

20(a) of the Securities Exchange Act of 1934. Under the Section 14(a) claim, Plaintiffs allege

the Defendants made actionable misstatements and omissions in the preliminary and definitive

proxies issued in connection with the Merger. Under the Section 10(b) claim, Plaintiffs contend

the Defendants made materially misleading statements and omissions about SMIL's financial

results and future prospects in the proxies and public statements before and after the Merger.

The Section 20(a) claim purports to hold the individual defendants vicariously liable for primary

violations by the corporate defendants.

Argument

I. PLAINTIFFS HAVE FAILED TO STATE A CLAIM FOR SECURITIES FRAUD AGAINST SEARCHMEDIA OR THE IDEATION DEFENDANTS UNDER SECTION 10(b) OF THE EXCHANGE ACT.

To state a securities fraud claim under Section 10(b) of the Securities Exchange Act of

1934, a plaintiff must show: (1) a misstatement or omission; (2) of a material fact; (3) made with

scienter; (4) on which the plaintiff justifiably relied; and (5) that proximately caused the

plaintiff's injury. Bryant, 187 F.3d at 1281. The PSLRA imposes two additional pleading

requirements. First, the plaintiff must identify "each statement alleged to have been misleading"

and provide the specific reasons why each statement was misleading. 15 U.S.C. § 78u-4(b)(1).

Second, for each alleged misrepresentation or omission, the plaintiff must "state with

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

2 The named Defendants are SearchMedia, SMIL, the Ideation Defendants (Frost, Fried, Uppaluri, Rubin, Beier, Gold, Halpryn, and Moskowitz), SMIL's management team (Garbo Lee, Qinying Liu, Earl Yen, and Jennifer Huang), and Searchlvledia's CEO (Paul Conway). Plaintiffs have not yet served the Complaint and summons on the SMIL Defendants and Conway, who reside in China. This Court has ordered that "any Defendant for whom a return of service is not filed on or before July 29, 2011 SHALL be dismissed without prejudice." [D.E. 43.]


state of mind [i.e., scienter]." 15 U.S.C. § 78u-4(b)(2). Plaintiffs' failure to satisfy the

heightened particularity and scienter pleading requirements is discussed in more detail below.

A. The Amended Complaint Does Not Plead Particular Facts Giving Rise to a Strong Inference that the Ideation Defendants Acted with Scienter.

The Amended Complaint fails to plead particular facts giving rise to a strong inference

that the Ideation Defendants acted with scienter. In determining whether a strong inference of

scienter exists, the Court must take into account plausible opposing inferences. Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). It is not enough for a plaintiff to assert

purely speculative theories. Instead, the facts alleged must give rise to a strong inference of

scienter that is "more than merely reasonable or permissible" and the inference of scienter must

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

314. "In sum, the reviewing court must ask: When the allegations are accepted as true and taken

collectively, would a reasonable person deem the inference of scienter cogent and at least as

compelling as any opposing inference?" Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1240

(11th Cir. 2008) (citations omitted).

The allegations in the Amended Complaint, viewed collectively, support only one

plausible inference (and if not the only inference, certainly the most compelling one): the

Ideation Defendants were the victims, not the perpetrators, of a fraud. The Ideation Defendants

committed significant personal resources in support of this transaction. It is economically

nonsensical to suggest—as Plaintiffs do thatthe Ideation Defendants would knowingly pursue

an acquisition based on a price they knew to be substantially inflated. It also defies economic

logic to believe that three Ideation directors (Frost, Rubin, and Uppaluri) would agree to make

additional purchases of Ideation stock (up to $18.25 million) in support of the Merger even

9


though they knew, under Plaintiffs' theory, that the stock price was significantly inflated. See

Exh. C at 4.

Investments after the Merger likewise support only one plausible inference rebutting

any notion of scienter. Immediately after the Merger, SearchMedia's board of directors approved

a stock and warrant repurchase program up to $5 million, through which the Company

repurchased $3.8 million of its warrants. See Exh. J at 16. These warrant repurchases, which

confirm the Ideation Defendants' belief that SearchMedia's stock was undervalued, not

artificially inflated, negate any inference of scienter. See In re Tibco Software, Inc. Sec. Litig.,

No. C-05-2146-SBA, 2006 WL 1469654, at *18 (N.D. Cal. May 25, 2006) ("Stock repurchase

programs actually negate a finding of scienter."); Mathews v. Centex Telenianagenient, Inc., No.

C-92-1837-CAL, 1994 WL 269734, at *6 (N.D. Cal. June 8, 1994) (noting in Section 10(b)

lawsuit that it "would have made no sense" for the corporation to repurchase its own stock "if

defendants knew the prices to be inflated"). At the same time of the warrant repurchase, one of

the Ideation Defendants purchased a substantial number of SearchMedia shares on the open

market, further negating any inference of scienter. See Exhs. K-M.

It was only after a new CFO and new CEO were installed in January and February 2010

that the Company began to unravel the accounting improprieties committed by SMIL prior to the

Merger. That was followed by an announcement from the new CEO that certain accounts

receivable related to the in-elevator division were not collectible. (Am. Compl. ¶ 73.) In August

2010, the Company announced for the first time that it could not substantiate certain revenues

and that it would restate SMIL's financial statements for 2007 and 2008. Id. ¶ 80. The Company

subsequently announced that it had commenced legal action against the former shareholders and

directors of SMIL.

10


This pattern of events gives rise to a strong inference that the Ideation Defendants first

learned about accounting improprieties after the Merger. The Amended Complaint does not

point to one specific fact, internal report, or confidential witness statement that indicates the

Ideation Defendants knew prior to the Merger of any of the accounting problems that eventually

led to the restatement. To the contrary, the facts pled show exactly the opposite.

One of the most compelling facts that Plaintiffs admit is that the Ideation Defendants

voluntarily disclosed the problems with SMIL's accounting and operations once they and new

management discovered them. See Gaines v. Guidant Corp., 1:03CV00892-SEB-WTL, 2004

WL 2538374, at *18 (S.D. Ind. Nov. 8, 2004) ("[I]n light of Defendants' repeated, voluntary

disclosures of negative information regarding Ancure, as contained in the Complaint, the

allegations considered as a whole preclude a strong inference of scienter."); Plumbers &

Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 1:08-CV-01041-SEB-DM,

2011 WL 338865, at *18 (S.D. Ind. Jan. 28, 2011) ("Defendants' openness in discussing the

matter in April and May actually weighs against a conclusion of scienter on their part."); In re

Nokia Corp. Sec. Litig., 1998 U.S. Dist. LEXIS 4100, at *38 (S.D.N.Y. Mar. 31, 1998) (finding

that voluntarily disclosing negative information "undercuts" allegation that defendants acted

recklessly). They did so to their financial detriment inasmuch as their shares were still subject to

a lock-up agreement.

Without any facts to demonstrate that the Ideation Defendants actually knew about the

accounting improprieties at SMIL before the Merger, Plaintiffs instead speculate that the

Ideation Defendants must have been severely reckless for failing to uncover the accounting

issues during their pre-Merger investigation because they "held themselves out as sophisticated

veterans in the arena of mergers and acquisitions" and "represented that they had conducted due

11


diligence of SMIL." (Am. Compl. ¶J 96, 98.) Conclusory allegations that a defendant failed to

conduct adequate due diligence do not support an inference of scienter. See In re Bayou Hedge

Fund Litig., 534 F. Supp. 2d 405, 416 (S.D.N.Y. 2007) ("South Cherry's alternative allegation

that Hennessee Group failed to perform due diligence commensurate with industry standards is

inadequate to plead scienter."), affd sub nom. S. Cherry St., LLC v. Hennessee Group LLC, 573

F.3d 98 (2d Cir. 2009); see also California Pub. Eniployees'Ret. Sys. v. Chubb Corp., CIV. NO.

00-4285(GEB), 2002 WL 33934282, at * 19 (D.N.J. June 26, 2002) (rejecting plaintiffs'

argument that defendants "must have" known about the true facts at target company because of

due diligence review). The reality is that there is always a material risk, even after conducting

reasonable due diligence, that an acquiring company will discover that something is amiss at the

target company once it begins to actually operate the company post-closing. See, e.g., In re

McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (ND. Cal. 2000) (involving company

that discovered $327 million in improperly recorded transactions following acquisition); Roth v.

OfJiceMax, Inc., 527 F. Supp. 2d 791 (ND. Ill. 2007) (following acquisition, acquiring company

restated financial results and terminated certain employees). In fact, Ideation expressly warned

of this risk, stating: "[e]ven if we conduct extensive due diligence on a target business with

which we combine, we cannot assure you that this diligence will surface all material issues that

may be present inside a particular target business." Exh. A at 22.

Plaintiffs also assert that the magnitude of the financial restatement gives rise to a strong

inference of scienter. In some instances a large overstatement of revenue may provide support

for an inference that the company's incumbent directors and officers acted with scienter, see, e.g.,

In re Eagle Building Tech., Inc. Sec. Litig., 319 F. Supp. 2d 1318, 1326 (S.D. Fla. 2004), but it

does not support an inference that an acquiring company's directors and officers acted with

12


scienter, especially where, as here, the GAAP violations occurred prior to a merger, there were

no "red flags" putting them on notice that the financials were inaccurate, and the target company

had audited financial statements that according to the independent auditor had been prepared

in conformity with U.S. GAAP. See Home Depot, 544 F.3d at 1247 (finding allegations

regarding widespread nature and amount of fraud were insufficient to draw inference that high-

ranking officials acted with scienter, especially where there were no claimed communications

connecting officials to fraud).

Plaintiffs further posit that scienter may be inferred from the Ideation Defendants'

"financial motivation" to consummate the Merger. Had Ideation not completed a business

combination by November 19, 2009 (the "Combination Deadline"), it would have ceased

operations and liquidated. Under such a scenario, the shareholders would have received a pro

rata distribution of Ideation's remaining assets, but the stock and warrants that had been issued to

Ideation's insiders in the November 2007 private placement would have become worthless.

Based on this hypothetical scenario, Plaintiffs allege the Ideation Defendants were motivated to

withhold information about SMIL's accounting issues because the shareholder vote on the SMIL

acquisition was scheduled approximately one month before the Combination Deadline, which

left too little time to terminate the SMIL deal and complete a business combination with another

company. (Am. Compl. ¶ 118.)

Contrary to Plaintiffs' characterization of pre-Merger events, the Merger was anything

but a rushed affair. Ideation identified SMIL as a potential target and signed a confidentiality

agreement more than one year before the Combination Deadline. See Exh. D at 101. That was

followed by a lengthy due diligence period and the announcement in April 2009 that Ideation

had entered into a merger agreement with SMIL. If, as Plaintiffs contend, the Ideation

13


Defendants had discovered the accounting improprieties, it would have happened before April

2010. which would have left sufficient time for Ideation to terminate the transaction with SMIL

and pursue a business combination with another potential target (including ten targets with which

Ideation previously had signed term sheets). Id. at 10 1-02.

Even if there had not been sufficient time to acquire another business, Plaintiffs'

"financial motivation" theory makes no sense for at least two reasons. First, the Ideation

Defendants purchased more than $1 million in stock and warrants in the Ideation IPO (in

addition to purchasing shares in the private placement). If Ideation had liquidated, the Ideation

Defendants would have received cash for all of the IPO shares and warrants, which would have

almost equaled their pre-IPO private investments in Ideation. Second, the shares that the

Ideation Defendants purchased in the private placement were held in escrow for a period of one

year following the business combination and therefore could not be sold. See Exh. A at 12.

Consequently, if the Ideation Defendants had been financially motivated to enrich themselves at

the expense of shareholders, they would have waited for the one-year lock-up period to expire

before disclosing the accounting improprieties. Instead, they made the disclosure during the

summer of 2010, before the lock-up period expired. In doing so, the Ideation Defendants acted

against their own financial self-interest because they had not yet had an opportunity to sell their

stock, which negates any inference of scienter. See Home Depot, Inc., 544 F.3d at 1253 ("In this

case, the amended complaint says nothing about suspicious stock transactions by any of the

individual defendants, an omission that weighs against inferring scienter."); Rosenzweig v.

Azurix Corp., 332 F.3d 854, 867 (5th Cir. 2003) ("[T]here is no allegation that defendants sold

their [company] shares, calling into question the alleged motive to artificially inflate the stock

price."); In re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308, 1326 (M.D. Fla. 2002) ("This

14


lack of sales by these high-level insiders . . . certainly weighs against an inference of scienter.").

In fact, to date, none of the Ideation Defendants other than Shawn Gold (who in March 2011 sold

1,000 of the 10,000 shares he holds) have sold a single warrant or share of SearchMedia stock,

including any of the shares and warrants they purchased in the IPO and in the open market.

B. Plaintiffs Have Failed to Plead Facts Giving Rise to a Strong Inference that SearchMedia Had Scienter.

Plaintiffs also fail to plead particular facts giving rise to a strong inference that

SearchMedia acted with scienter. Because a corporation has no state of mind, a plaintiff who

asserts a Section 10(b) or 14(a) claim against a corporation must demonstrate that a high-ranking

corporate officer made (or participated in the making of) a false or misleading statement with the

necessary scienter, in which case the officer's state of mind may be imputed to the corporation.

See Home Depot, 544 F.2d at 1252 (holding that, for purpose of determining corporation's

scienter, "we 'look to the state of mind of the individual corporate official or officials who make

or issue the statement (or order or approve it or its making or issuance, or who furnish

information or language for inclusion therein, or the like).") (quoting Southland Sec. Corp. v.

INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004)); see also Daniel S. Floyd et al.,

Securities Litigation, § 3:4.3 (2011) (noting that Eleventh Circuit rejected "collective scienter"

theory which imputes scienter to the company of unnamed officers or directors without requiring

plaintiffs to link a specific speaker acting with scienter in making a specific false statement).

1. SearchMedia Had No Pre-Merger Scienter.

As explained above, the facts alleged in the Amended Complaint do not support a strong

inference that any of the Ideation Defendants acted with scienter for the Pre-Merger Statements.

See supra Section I.A. It necessarily follows that SearchMedia (then Ideation) did not act with

scienter for the Pre-Merger Statements. See Home Depot, 544 F.2d at 1252 (dismissing Section

15


10(b) claims against Home Depot because plaintiff "failed to plead scienter adequately for any of

the individual defendants"). Because the SMIL Defendants did not hold any positions at

SearchMedia until the Merger was consummated, their state of mind cannot be imputed to the

corporation for the Pre-Merger Statements. See Schultz v. Applica Inc., 488 F. Supp. 2d 1219,

1227 (S.D. Fla. 2007) (explaining that only "[t]he knowledge of individuals who exercise

substantial control over a corporation's affairs is properly imputable to the corporation").

2. There Is No Post-Merger Corporate Scienter.

Plaintiffs contend that SearchMedia has conceded that it acted with scienter when any of

the SMIL Defendants made false or misleading statements after the Merger because

SearchMedia has commenced claims against the former shareholders and directors of SMIL for

fraud. (Am. Compl. ¶J 91-92.) This vague and conclusory assertion is not the type of

particularized allegation required by the PSLRA. The Amended Complaint does not allege who

among the group of former SMIL directors and shareholders is being pursued on the legal

claims, what each of those individuals knew that constituted fraud, and when they supposedly

knew it. See Home Depot, 544 F.3d at 1237 (holding that to satisfy heightened pleading

requirements for fraud against the corporation, plaintiff must specifically plead which corporate

officer or director made the false statement and facts establishing that the speaker acted with

scienter). By failing to identify a specific statement by a specific speaker acting with scienter,

Plaintiffs have not plead scienter against SearchMedia for the Post-Merger Statements.

C. The Amended Complaint Fails to Attribute the Pre- and Post-Merger Statements to the Ideation Director Defendants.

The Amended Complaint seeks to impose lob-S liability on the Ideation Defendants not

only for the statements in the preliminary and final Proxy but also for four statements before the

Merger and six statements after the Merger. (Am. Compl. ¶J 53-56, 67, 68, 70, 73, 76, 78.)

16


However, most of the Ideation Defendants cannot be held liable for any of these ten statements

because they did not make any of the challenged statements, nor can any of the statements be

attributed to them under the group pleading doctrine. 3 Although the Amended Complaint cites at

length from these ten allegedly actionable statements in press releases, investor presentations and

SEC filings, only two of the Ideation Defendants are actually quoted in a few of the challenged

statements—Frost in one Pre-Merger Statement and Fried in one Post-Merger and three Pre-

Merger Statements. 4

1. The Ideation Outside Directors Are Not Liable for the Pre-Merger Statements Under the Group Pleading Doctrine.

Without any actual quotes to point to for most of the Ideation Defendants, Plaintiffs

attempt to attribute the Pre- and Post-Merger Statements to them through the use of the group

pleading doctrine. (Am. Compl. ¶ 42.) Under that doctrine, a plaintiff may impute a company's

public filings, press releases, or other "group published" information "to all inside corporate

officers and directors, who are presumed to have knowledge of and involvement in the day to

day affairs of the company." In re Sensorni at/c Elecs. Corp. Sec. Litig., No. 018346, 2002 WL

1352427, at *4 (S.D. Fla. June 10, 2002) (emphasis added); see also Bruhl v. Conroy, No. 03-

23044-Civ, 2007 WL 983228, at *2 (S.D. Fla. Mar. 27, 2007).

No such presumption applies, however, to non-employee outside directors unless the

complaint includes specific, fact-based allegations that the "outside director either participated in

the day-to-day operations of [the Company, or prepared or communicated the Company's group

published information at a particular time." In re Pegasus Wireless Corp. Sec. Litig., 657 F.

The Ideation Defendants concede that the statements in the preliminary and final Proxy can be attributed to them and, therefore, they rely on their scienter and forward-looking statements arguments to dismiss those statements.

For the reasons more fully explained above, Plaintiffs have failed to state a Section 10(b) claim against Fried or Frost based on these limited quotes in Pre- or Post-Merger Statements.

17


Supp. 2d 1320, 1326 (S.D. Fla. 2009) (holding that group pleading doctrine could not salvage

conclusory allegations that outside director was signatory to, and responsible for, corporation's

public statements).

Here, the Amended Complaint suggests that the group pleading doctrine is applicable to

the Ideation Defendants based on vague allegations about their positions in the Company and

access to unnamed reports and press releases. (Am. Compl. ¶ 42.) Such rote and conclusory

allegations are precisely the type of allegations that have been rejected by this Court and other

courts as not supporting the application of the group pleading doctrine to outside directors such

as Frost, Halpryn, Beier, Moskowitz and Gold (the "Ideation Outside Directors"). See Bruhi,

2007 WL 983228, at * 1 (finding allegations in initial complaint that director defendants

published and furnished reports "too vague and conclusory" to support finding that directors

actually made a false or misleading statement); In re Pegasus, 657 F. Supp. at 1325; Durgin v.

Mon, 659 F. Supp. 2d 1240, 1254 (S.D. Fla. 2009) (refusing to apply group pleading doctrine

where complaint contained "conclusory allegations regarding the role Defendants played in the

Company"). Because the Amended Complaint does not plead specific facts demonstrating that

the Ideation Outside Directors were directly involved in the everyday business of Ideation and

the preparation of the Pre-Merger Statements, the group pleading doctrine cannot salvage

Plaintiffs' claims against them based on those statements. 5

Frost is quoted in a single Pre-Merger Statement, an April 1, 2009 press release, as saying: "Searchlvledia has built a strong market position in China's fast-growing outdoor advertising market and is well positioned to continue its impressive growth trend." (Am. Compl. ¶ 53.) Frost cannot be held liable for that lone statement because the Amended Complaint fails to sufficiently plead why that statement was false or that Frost acted with scienter when he made it. Moreover, the quote is not actionable because, as explained in footnote 6 below, it is a forward-looking statement of opinion that is protected by the PSLRA's safe harbor for forward-looking statements.

18


2. The Ideation Defendants Cannot Be Liable for Any Post-Merger Statements That They Did Not Make and That Cannot Be Attributed to Them.

After the Merger, five of the Ideation Defendants (Uppaluri, Frost, Moskowitz, Beier,

and Gold), were not affiliated as officers or directors with SearchMedia and, therefore, did not

sign, nor were they quoted in, the six Post-Merger Statements. Thus, these five Ideation

Defendants cannot possibly be held liable for any of the Post-Merger Statements. See In re

Pegasus, 657 F. Supp. at 1326 (ruling as a matter of law in favor of director where Section 10(b)

claim was based on alleged misrepresentations defendant did not make).

The only Ideation Defendants who continued to serve as directors after the Merger in

SearchMedia were Fried, Rubin, and Halpryn. No Ideation Defendant continued in any capacity

as an officer or employee of SearchMedia. Because they served only as outside directors they

cannot be held liable under the group pleading doctrine for the Post-Merger Statements made by

others because Plaintiffs have not sufficiently alleged that they were actively involved in

SearchMedia's day-to-day affairs. 6 See In re Pegasus, 657 F. Supp. 2d at 1326; Durgin, 659 F.

Supp. 2d at 1254. Accordingly, the Section 10(b) claims against the Ideation Directors founded

upon the Pre- and Post-Merger Statements should be dismissed as a matter of law for failure to

sufficiently plead any actionable statement by them. 7

6 Fried was quoted in only one of the Post-Merger Statements, an April 16, 2010 press release, in which he disclosed that operational issues had been discovered at the Jingli subsidiary, advised that Searchlvledia would likely reverse certain revenues previously reported for 2009, and noted personnel changes and enhancements to the Company's management processes. (Am. Compl. ¶ 76.) Plaintiffs claim these statements were false because Fried did not disclose the magnitude of the accounting irregularities at the Company and Searchlvledia eventually wrote off more revenue than projected. Id. ¶ 77. Such fraud by hindsight pleading is insufficient to sustain any claim founded on this one Post-Merger Statement by Fried. See In re Technical Chem. Sec. Litig., 2001 WL 543769, at *6 (S.D. Fla. Mar. 20, 200 1) (rejecting "hindsight approach to alleging fraud").

Several of the Pre- and Post-Merger Statements are non-actionable because they are forward-looking statements. Under the PSLRA's safe harbor, forward-looking statements are immunized if either they are accompanied by meaningful cautionary statements or plaintiffs do not sufficiently allege that the

19


II. THE AMENDED COMPLAINT FAILS TO STATE A SECTION 14(a) CLAIM AGAINST THE IDEATION DEFENDANTS OR SEARCHMEDIA.

To state a claim under Section 14(a) and SEC Rule 14a-9, a plaintiff must allege, among

other things, a false or misleading statement or omission of material fact in a proxy statement,

and that the misrepresentation or omission was made with the requisite level of culpability.

Desaigoudar v. Meyercord, 223 F.3d 1020, 1022 (9th Cir. 2000); In re Verisign, Inc. Deny.

Litig., 531 F. Supp. 2d 1173, 1211 (ND. Cal. 2007). "Under the PSLRA, a § 14(a) claim must

be pled with particularity." Verisign, 531 F. Supp. 2d at 1211; Hayes v. Crown Central

Petroleum Corp., 78 Fed Appx. 857, 862 (4th Cir. 2003). Accordingly, a plaintiff must "specify

each statement that is alleged to have been misleading, [and] the reason or reasons why the

statement is misleading," and for each defendant state particularized facts that give rise to a

strong inference of the requisite culpability negligence for statements of fact; and actual

knowledge of falsity for opinions. Fishery. Kansas, 467 F. Supp. 2d 275, 281 (E.D.N.Y. 2006);

Knollenberg v. Harmonic, Inc., 152 Fed. Appx. 674, 683 (9th Cir. 2005); Shidler v. All American

challenged statements were made with actual knowledge of theft falsity. See Harris v. IVAX Corp., 182 F.3d 799, 803 (11th Cir. 1999) (explaining two prongs of the safe harbor provide alternate bases for protection of forward-looking statements). Here, the challenged forward-looking statements discussed: future revenue projections for SMIL (Am. Compl. ¶J 54, 56); the Ideation Defendants' beliefs about SN'IIL's future prospects (Ed. ¶J 53, 59, 63); and estimates of the financial impact that would likely result from the post-Merger discovery of operational issues at a SMIL subsidiary (Ed ¶ 76). These statements were immunized under the first prong of the safe harbor because they were accompanied by meaningful warnings about important factors that could influence the forecasts, including the precise risk that ultimately occurred, namely, unforeseen wrongdoing at SMIL and its subsidiaries. See Ideation Proxy, at 39 (warning that "[f]ailure to maintain an effective system of internal control over financial reporting may adversely affect Searchlvledia's ability to accurately report its financial results or prevent fraud"); Ed. at 38 ("Although [SMIL] has conducted due diligence with respect to its acquisitions, it may not have implemented sufficient due diligence procedures and many not be aware of all of the risks and liabilities associated with such acquisitions. Any discovery of adverse information concerning the acquired companies could have a material adverse effect on [SMIL's] business, financial condition and results of operations."); Ed at 112 (noting that projections in Proxy are "not fact and should not be relied upon as being necessarily indicative of future results, and readers of this Proxy are cautioned not to place undue reliance on the prospective financial information"). In addition, these forward-looking statements are not actionable under the second prong of the statutory safe harbor because, as demonstrated in Section I.A. below, Plaintiffs have failed to demonstrate that the Ideation Defendants satisfied the less demanding, severely reckless, scienter standard.

20


Life & Fin. Corp., 775 F. 2d. 917, 927 (8th Cir. 1985) (affirming dismissal of Section 14(a)

claim based on supposedly misleading facts in proxy where complaint did not sufficiently allege

a strong inference of negligence).

Here, Plaintiffs claim that the Ideation Defendants made false and misleading statements

in Ideation's preliminary and definitive Proxies in violation of Section 14(a). (Am. Compl. ¶J

58-61.) Specifically, Plaintiffs allege that shareholders were misled into approving the Merger

by the following information and opinions in the Proxy:

1. SMIL's financial information for 2007 and 2008; (Am. Compl. ¶ 58)

2. The Ideation Defendants' opinions that:

. "[SMIL] has demonstrated an attractive financial profile;"

. "[SMIL's] business model is highly scalable;"

• "[SMIL's] business will continue to demonstrate an attractive financial profile;" and

• "Although financial projections are inherently uncertain. . . the projections for [SMIL's] business are reliable;" (Id. ¶ 59)

3. A disclosure that, in connection with the audit of SMIL's financial statements for 2007 and 2008, its independent auditors identified "significant control deficiencies in its internal control procedures," and that, thereafter, SMIL "undertook certain remedial steps to address certain deficiencies, including hiring additional accounting staff and training its new and existing accounting staff and conducting due diligence on companies with which it does business to identify parties." (Id. ¶ 60); and

4. The Ideation Defendants' opinion that SMIL had a fair market value of at least 80% of Ideation's net assets. (Id. ¶ 61).

According to Plaintiffs, the Ideation Defendants and SearchMedia (then Ideation) were

negligent in including these opinions and information in the Proxy because, had the Ideation

Defendants exercised reasonable care in conducting due diligence prior to the Merger, they

would have uncovered the accounting improprieties at SMIL. Id. ¶J 7, 62, 65, 105, 116.

21


A. Plaintiffs Have Not Sufficiently Pled that the Opinions Underlying the Section 14(a) Claim Were Subjectively False.

Two of the four categories of supposedly actionable statements in the Proxy, Nos. 2 and

4, are statements of opinion about the fair market value of SMIL and its future prospects. The

scienter standard under Section 14(a) for opinions is an actual knowledge standard. Plaintiffs

must plead, with the requisite specificity, that the opinion was both objectively and subjectively

false. See Hayes, 78 Fed. Appx. at 864 (4th Cir. 2003) ("Liability may arise under Section 14(a)

for false statements of reasons, opinion, and belief that are knowingly made."); In re Textainer

Partnership Sec. Litig., 2005 WL 3801596, at *9 (N.D. Cal. Feb. 17, 2006) (dismissing Section

14(a) claim founded upon opinion that asset sale was fair because plaintiff failed to sufficiently

allege that the defendants did not actually hold the opinion stated); In re McKesson, 126 F. Supp.

2d at 1267 ("In the case of a fairness opinion . . . the plaintiff must plead with particularity why

the statement of opinion was objectively and subjectively false."). Here, the Section 14(a) claim

based on these opinions should be dismissed because the Amended Complaint does not allege

(nor could it for the reasons discussed in Section l.A.) that the Ideation Defendants did not

subjectively believe what they opined. 8 See In re Bank ofAnierica Corp. Sec., Deny, and ERISA

Litig., No. 09 MD 2058 (PKC), 2010 WL 3448194, at *39 (S.D.N.Y. Aug. 27, 2010)

(dismissing, in part, Section 14(a) claims regarding BoA statements about its due diligence of

Merrill Lynch acquisition and adequacy of Merrill's assets because no showing that BoA

8 Likewise, the Section 14(a) claim founded upon the statements in category No. 3 above, relating to internal control deficiencies identified by KPMG, should also be dismissed for failure to satisfy the PSLRA's mandate requiring the reasons why those statements were false or misleading. Nowhere does the Amended Complaint allege that the internal control deficiencies were not found, that they were different than what was reported, or that SMIL did not take the remedial steps indicated in the Proxy. Thus, these challenged statements cannot form the basis for any Section 14(a) claim. See Fisher, 467 F. Supp. 2d at 284 (granting motion to dismiss where "Plaintiffs allegations [were] insufficient to state a claim pursuant to Section 14(a). .

22


directors knew such statements were false when made); Podany v. Robertson Stephens, Inc., 318

F. Supp. 2d 146, 154 (S.D.N.Y. 2004) (affirming dismissal based on opinion statement because

"Lilt is not sufficient to allege . . . that it would have been possible to reach a different opinion

than that reached by defendants based on information available to defendants at the time, or even

that the defendant's opinion was unreasonable").

B. The Ideation Defendants Were Not Negligent in Failing to Uncover the Accounting Improprieties at SMIL Prior to the Merger.

The remainder of Plaintiffs' Section 14(a) claim is based on the premise that the Ideation

Defendants were negligent during their due diligence process in failing to uncover the problems

in SMIL's audited financials and that such problems were so significant that the Ideation

Defendants were reckless in failing to detect them. Although Plaintiffs claim the due diligence

process was flawed, they do not dispute that it included, among other things: a nearly year-long

due diligence process, Ideation's retention of financial, legal and accounting advisors to assist in

the process, numerous meetings in the U.S. and China, interviews with SMIL customers, reliance

on clean audit opinions from KPMG for SMIL's 2007 and 2008 financial statements, and

knowledge that Deutsche Bank had made a substantial investment in SMIL. Exh. D at 39, 101-

04, 114, F-36.

Ignoring these facts, Plaintiffs instead group all the defendants together and make the

conclusory allegation that the due diligence process was flawed. 9 Plaintiffs do not, however,

Although the Amended Complaint seeks to impose Section 14(a) liability on all of the Ideation Defendants, it includes only a single conclusory allegation about three of them (Fried, Uppaluri and Rubin), namely, that they traveled to China to meet with the SMIL management team and to "review diligence items and tour the facilities." (Am. Compl. ¶J 27, 29, 30.) This lone allegation fails to attribute specific knowledge and conduct to each particular defendant, as is required by the PSLRA. The Amended Complaint includes no allegations regarding the remaining Ideation Defendants' purported role in the due diligence. Because the Amended Complaint does not explain each of the Ideation Defendants' supposed role in the due diligence or their knowledge or access to critical SMIL financial information, it fails to satisfy the PSLRA's pleading requirements for stating a Section 14(a) claim against any of them.

23


allege that the Ideation Defendants received any emails, memos, or letters or attended any

meetings in which they learned about accounting problems at SMIL during the due diligence

process. Instead, the primary fact Plaintiffs point to in support of their conclusion that there is a

strong inference that the Ideation Defendants acted negligently in including SMIL's audited

financials in the Proxy was that the accounting problems later discovered were so big they

should have been found sooner. (Am. Compl. ¶ 105.) Under this approach, any director of any

company making an acquisition would be strictly liable for a subsequent restatement after the

acquisition even if the due diligence efforts were textbook perfect, the financials of the target

were certified with clean opinions, and the directors did not know and had no reason to know of

any misstatements in the target's financials. This attempt to impose strict liability under Section

14(a) has been rejected universally by courts addressing the issue. See Shidler, 775 F.2d at 927

("A strict liability rule would impose liability for fully innocent misstatements. It is too blunt a

tool to ferret out the kind of deceptive practices Congress sought to prevent in enacting section

14(a)."); Gould v. Am. Hawaiian S.S. Co., 351 F. Supp. 853, 860 (D. Del. 1972) (in holding that

Section 14(a) did not impose strict liability standard, the court reasoned: "[T]he liability sections

should be interpreted to afford incentives to directors to undertake active and rigorous scrutiny of

corporate activities, and should not be construed to make such efforts of no significance in

precluding liability for misstatements against which a director cannot reasonably protect.").

The case of In re McKesson HBOC, Inc. Securities Litigation, 126 F. Supp. 2d 1248

(ND. Cal. 2000), which is factually similar to the instant case, is instructive on what must be

alleged to survive a motion to dismiss a Section 14(a) claim. In McKesson, shareholders brought

See Trans World Corp v. Odyssey Partners, 561 F. Supp. 1315, 1320 (S.D.N.Y. 1983) (granting motion to dismiss Section 14 claims because "the complaint's repeated references to action of the 'defendants,' without differentiation among the various defendants, is unacceptable . . . each defendant is entitled to know precisely what [the plaintiff] is alleging as to him or it").

24


a Section 14(a) claim against the directors of the acquiring corporation, McKesson, Inc., when

within four months of the acquisition, they learned there were accounting improprieties at the

acquired company, HBO & Company (HBOC), that rendered its financial statements in the

proxy inaccurate. Id. at 1248. Although HBOC's financial statements had previously been

audited by Arthur Andersen, those financials were restated after the acquisition due to more than

$300 million in improperly recorded transactions at HBOC. Id. at 1253.

Like the Plaintiffs here, the plaintiffs in McKesson argued that due to the sheer magnitude

of the problems uncovered after the acquisition, the McKesson directors were liable under

Section 14(a) for failing to uncover the issues during their due diligence before the acquisition.

The court disagreed. In granting the McKesson directors' motion to dismiss, the court reasoned

that "[w]hile Arthur Andersen may or may not have been negligent in failing to uncover the

improprieties, there is no suggestion in the complaint that . . . [the] McKesson [directors] could

have known, even with reasonable diligence, that HBOC was engaged in massive accounting

fraud." Id. at 1267. Thus, the court held that the directors' reliance on the Arthur Andersen audit

was justifiable and that it negated the necessary inference of negligence to state a Section 14(a)

claim against the McKesson directors. Id. at 1268.

As in McKesson, the Plaintiffs here have not alleged sufficient facts to create a strong

inference that any of the Ideation Defendants acted negligently. Other than the bare conclusion

that the due diligence did not uncover the accounting improprieties at SMIL prior to the Merger,

the Amended Complaint is devoid of any suggestion as to why the due diligence was flawed.

Plaintiffs have not alleged one fact known to the Ideation Defendants prior to the closing that

shows a strong inference of negligence. To the contrary, Plaintiffs admit that the Ideation

Defendants engaged experts including independent accountants, lawyers and a financial advisor

25


to assist them in their due diligence efforts and that KPMG audited SMIL's financials and gave it

a clean bill of financial health.

The mere fact that, in hindsight, neither the professionals nor the Ideation Defendants

uncovered the later-found accounting irregularities at SMIL, does not satisfy Plaintiffs' burden of

showing a strong inference that the Ideation Defendants acted negligently in approving the

Proxy. See Gould, 351 F. Supp. at 866 ("[Negligence standard does not make impermissible

any reliance on expertise of legal or financial counsel in areas pertinent to their respective

expertise," or "impose upon directors the role of guarantors or insurers of the accuracy of proxy

statements."). To the extent Plaintiffs' claim rests on the untenable notion that Section 14(a)

required the Ideation Defendants, who were not officers or directors of SMIL, to second-guess

and reevaluate the judgment of hired professionals, it should be dismissed because Section 14(a)

does not impose such unreasonable demands on directors. See Gould, 351 F. Supp. at 865

(noting Section 14(a) does not require directors "to recalculate or reassemble financial or other

reports absent some evident misstatement or irregularity which should be within the directors'

knowledge and the exercise of reasonable care would necessitate either correcting or directing to

the expert's attention").

Nor have the Plaintiffs alleged any particularized facts that, if true, would show that (1)

the Ideation Defendants were at fault for not selecting the experts with reasonable care; (2) their

reliance on the professionals was unreasonable; or (3) the Ideation Defendants were privy to

information that contradicted the audited financial statements or other information provided to

them by the professionals. Ultimately, the allegations in the Amended Complaint do not create a

strong inference of negligence that is at least as probable as a non-fraudulent explanation,

namely that the Ideation Defendants conducted a reasonable investigation under the

26


circumstances and had no reasonable ground to question the accuracy of the challenged

statements in the Proxy. 10 Thus, the Section 14(a) claim against the Ideation Defendants and

SearchMedia should be dismissed for failure to plead the requisite culpability." See Shidler, 775

F.2d at 926 (affirming dismissal of Section 14(a) claim where defendant was not negligent in

issuing proxy statement); Rudolph v. Utstarconi, 560 F. Supp. 2d 880, 892 (ND. Cal. 2008)

(dismissing section 14(a) claim because plaintiff failed to adequately plead that defendants acted

negligently); Verisign, Inc., 531 F. Supp. 2d at 1212 (dismissing Section 14(a) claim because

plaintiffs failed "to plead the required state of mind with particularity as to each defendant, as

required by the PSLRA"); Gould, 351 F. Supp. at 859 (rejecting standard that would make "a

director who made a detailed examination of corporate records and obtained legal and financial

counsel to advise him. . . liable even if the materials supplied him were deliberately falsified in a

manner which he could not have ascertained").

III. THE AMENDED COMPLAINT FAILS TO ADEQUATELY ALLEGE A CLAIM FOR "CONTROL PERSON" LIABILITY.

The Amended Complaint also fails to state a claim against the Ideation Defendants for

control person liability under Section 20(a) of the Exchange Act. See 15 U.S.C. § 78t(a). In

order to state a control person claim, a plaintiff must allege: (1) a primary violation of the

securities laws by a controlled person; (2) that the defendant had the power to control the general

business affairs of the controlled person; and (3) that the defendant had the requisite power to

directly or indirectly control or influence the specific corporate policy which resulted in the

10 Because Plaintiffs are unable to establish that any of the Ideation Defendants acted with the requisite culpability, they are likewise unable to state an actionable Section 14(a) claim against Searchlvledia (then Ideation), the corporate entity those defendants managed. See Hubbard, 625 F. Supp. 2d at 1289 ("Plaintiff has not adequately pled scienter as to any of the Individual Defendants; therefore Plaintiff has failed to adequately plead scienter as to BankAtlantic.").

Given that the challenged statements in the preliminary and definitive versions of the Proxy do not satisfy the negligence standard required under Section 14(a), it necessarily follows that they do not satisfy the heightened scienter standard required under Section 10(b).

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primary liability. Theoharous v. Long, 256 F.3d 1219, 1227 (11th Cir. 2001). The Amended

Complaint asserts that the Ideation Defendants acted as controlling persons of SearchMedia.

(Am. Compl. ¶J 159-62, 167-72.) Because the Amended Complaint fails to adequately assert an

underlying violation of the Exchange Act against SearchMedia, however, Plaintiffs' Section

20(a) claims must be dismissed as well. See Brown v. Enstar Group, Inc., 84 F.3d 393, 396-97

(11th Cir. 1996).

Conclusion

For all the foregoing reasons, SearchMedia and the Ideation Defendants respectfully

request that this Court enter an order dismissing all claims in the Amended Complaint against

them.

Dated: May 2, 2011 Respectfully submitted,

HOLLAND & KNIGHT LLP

By: Is/Tracy A. Nichols Tracy A. Nichols Florida Bar No. 454567 tracynichols(äThklaw. corn Louise McAlpin Florida Bar No. 983810 1ouisemca1pi11(hk1aw. corn Stephen P. Warren Fla. Bar No. 788171 stephen.warrefl(äthklawcom 701 Brickell Avenue, Suite 3000 Miami, Florida 33131 Tel: (305) 374-8500 Fax: (305) 789-7799

Attorneys for Defendants SearchMedia Holdings Limited, Robert Fried, Phillip Frost, Rao Uppaluri, Steven Rubin, Glenn Halpryn, Thomas Beier, David Moskowitz, and Shawn Gold

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on May 2, 2011, I electronically filed the foregoing document

with the Clerk of the Court using CM/ECF. I also certify that the foregoing document is being

on all counsel listed below either via transmission of Notices of Electronic Filing generated by

CM/ECF or U.S. Mail:

By CM/ECF Notification

Peter A. Binkow pbinkow(glancylaw.com Glancy Binkow & Goldberg LLP 1801 Avenue of the Stars Suite 311 Los Angeles, CA 90067

Lester R. Hooker lhooker(saxenawhite.com Joseph E. White, III jwhite(saxenawhite.com Saxena White P.A. 2424 North Federal Highway Boca Raton, FL 33431

By U.S. Mail

Lionel Z. Glancy Michael Goldberg Glancy Binkow & Goldberg LLP 1801 Avenue of the Stars Suite 311 Los Angeles, CA 90067

Howard G. Smith 3070 Bristol Pike Suite 112 Bensalem PA 19020

Is/Tracy A. Nichols Tracy A. Nichols

#10284043 v7

Case 1:11-cv20549KMW Document 47 Entered on FLSD Docket...

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