In re Travelzoo Inc. Securities Litigation 11-CV-05531...

Case 1:11-cv-05531-GBD Document 39 Filed 01/06/12 of 56

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

IN RE TRAVELZOO INC. SECURITIES LITIGATION

Civil Action No.: 1 1-CV-5531 (GBD)

JURY TRIAL DEMANDED

CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

1. Lead Plaintiffs Michele Minnick and Jan Frazer ("Lead Plaintiffs" or "Plaintiffs")

allege the following upon information and belief, except as to those allegations concerning Lead

Plaintiffs, which are alleged upon personal knowledge. Lead Plaintiffs' information and belief

are based upon, among other things, Lead Counsel's investigation, which includes without

limitation, review and analysis of filings with the United States Securities and Exchange

Commission ("SEC"), press releases, news articles, and analyst reports. Lead Plaintiffs believe

that substantial additional evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

2. This is a federal class action on behalf of purchasers of the securities of Travelzoo

Inc. ("Travelzoo" or the "Company") between March 16, 2011, and July 21, 2011, inclusive (the

"Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the

"Exchange Act"). As alleged herein, Defendants published a series of materially false and

misleading statements that Defendants knew and/or recklessly disregarded were materially false

and misleading at the time of such publication, and that omitted to reveal material information

necessary to make Defendants' statements, in light of such material omissions, not materially

false and misleading.

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3. Travelzoo is a global Internet media company founded in 1998 by Defendant

Ralph Bartel. Travelzoo informs over 23 million subscribers worldwide, as well as millions of

website users, about travel, entertainment and local deals available from thousands of companies.

4. Travelzoo has two branches: (i) its core travel business, which publishes email

newsletters that offer sharply discounted travel deals in return for up-front advertising fees paid

by hotels, airlines, or cruises; and (ii) its Local Deals business, which was launched in August

2010, through which Travelzoo subscribers can purchase vouchers for deals from local

businesses such as spas and restaurants through the Travelzoo website. A portion of the fee from

the voucher is paid to the merchant, usually 60-70%, and the remainder is paid to Travelzoo.

Local Deals grew quickly after the first quarter of its introduction, which was the third quarter of

2010. In fact, from the first to second quarter of its operations, Local Deals' gross revenues

increased approximately 1000%.

5. Travelzoo launched Local Deals Getaways ("Getaways"), a branch of Local Deals

relating to travel, in March 2011 - but, tellingly, Defendants did not disclose the launch of

Getaways until June 1, 2011. Getaways differed from the usual Local Deals offers which sold

vouchers for, e.g., spas, restaurants, or other entertainment. Getaways, in contrast, sold vouchers

for hotels and travel, catering to subscribers who wanted a getaway local to them. Getaways was

thus a hybrid between Local Deals and the Company's core travel business. Getaways typically

paired a hotel stay with a spa or restaurant deal, often in driving distance from the subscriber.

6. During the Class Period, Getaways' business began to eat into Travelzoo's core

travel business, adversely affecting Travelzoo revenue growth and bottom line revenues in the

second quarter of 2011. Hotel rooms are limited and there were not an infinite amount of deals

that could be offered at any hotel. Thus, as confirmed by Defendant Loughlin after the Class


Period, offering a Getaway deal at a local hotel to subscribers who lived nearby was often at the

expense of offering a deal through the core travel branch.

7. Getaways adversely affected revenue growth and bottom line revenues because,

although both Getaways and core travel businesses related to hotel deals, advertising revenue

received by the core travel business was, in certain circumstances, superior to voucher revenue

received through Getaways. As noted, revenue was paid to the Company differently in the two

branches, core travel and Getaways. In the core travel part of the business, advertising revenue

was paid up front by hotels, airlines, or cruises in return for placing their business on Travelzoo's

email lists which were sent to its worldwide subscribers. In the Getaways business, revenue,

only 30-40% of which went to Travelzoo, was paid by a customer for a voucher that could be

redeemed at a local hotel.

8. For example, if Travelzoo offered a Getaways deal at a London hotel, to

Travelzoo customers who were in driving distance of (or a very short flight from) London, for

$1,000, and ten customers signed up, that would equal $10,000 in gross revenue. If Travelzoo' s

take rate was 40%, the Company would receive $4,000 in net revenue. If, in contrast, Travelzoo

offered a deal at the same hotel on its core travel side through its Top 20 email list to subscribers

worldwide (who would travel, often from far away, to London for this deal), the Company would

generally receive between $5,000 and $10,000 from the hotel in advertising revenue. Thus,

revenues were often not simply taken from one branch (core travel) and given to another

(Getaways) - overall revenues dropped as Getaways cannibalized core travel revenues, as

disclosed at the end of the Class Period.

9. Throughout the Class Period, Defendants were aware of such inevitable

cannibalization of growth and revenue by Getaways. Indeed, Defendant CEO Loughlin admitted


after the Class Period that he was aware of that danger but proceeded with Getaways anyway -

without communicating the effect such cannibalization would have on revenues, growth and

earnings to investors. Defendant Loughlin also admitted that revenue cannibalization caused

lower core travel revenue growth. Certain analysts put the rest together, realizing that the

revenue cannibalization had also, in part, caused lower overall revenues.

10. Although the Company does not issue specific guidance on earnings and

revenues, Defendants knew full well what analysts were reporting about the Company. A few

weeks before the start of the Class Period, on March 2, 2011, Defendant Loughlin appeared on

Jim Cramer's Mad Money on CNBC. Defendant Loughlin stated that "the analysts give

guidance. But you know what? We beat them.... It is a growth story and it's a very exciting

opportunity."

11. Indeed, Travelzoo met or exceeded analysts' estimates for seven straight quarters.

The shortfall in the second quarter 2011, the subject of this case, was the first shortfall since the

second quarter of 2009.

12. Defendants have made revenues and earnings growth Travelzoo's story from the

beginning. And Travelzoo's growth was astronomical. Between 2002 and 2010, Travelzoo's

annual revenues increased from $9.9 million to $112.8 million, and its net income grew from

$850,000 to $13.2 million. The Company repeatedly emphasized in very particular terms the

importance of continual growth, including revenue growth. In press release after press release,

conference call after conference call, the story was the same - the Company's meteoric and

unbroken growth. The Company's continued drumbeat on growth is significant because it

conditioned the market to view Travelzoo as a growth company, and growth companies

generally trade at premiums because their growth is taken into account when valuing the

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company. Further, for any company, but particularly for a growth company - which is precisely

how Defendants repeatedly described Travelzoo - what is significant is what lies ahead rather

than what lies behind.

13. Thus, after analysts reacted to Defendants' repeated statements concerning

growth, Defendants cannot claim that they had nothing to do with analyst expectations -

Defendants created such expectations with their own continuous and glowing statements about

growth.

14. On July 21, 2011, Travelzoo announced lower than-expected revenues caused, in

part, by Getaways' cannibalization of revenues and growth from the Company's core business

branch. This revelation caused Travelzoo stock to collapse from approximately $90 per share to

approximately $60 per share - over 30% - losing approximately $220 million in market

capitalization in one day. Travelzoo stock currently trades around $25 per share.

15. Defendants' motive to commit fraud is clear from the unmistakable pattern,

suspicious timing, and overwhelming amount, of insider sales: Defendant CEO Christopher

Loughlin, who had never sold one Travelzoo share, suddenly sold 100% of his Travelzoo shares

- which he had slowly bought for years - on May 2, 2011, just weeks after a stellar first quarter

earnings and revenue announcement, and a week before he was selling the Company's growth on

Mad Money. Likewise, Defendant director and Company founder Ralph Bartel, after selling no

Travelzoo shares for over four and a half years, unloaded a whopping $186 million worth of

Company shares during just seven weeks of the Class Period. Finally, Defendant Kelly Urso

sold about 95% of her Travelzoo shares during the Class Period on the heels of the stellar first

quarter earnings announcement. Further, Defendant Urso had sold shares only once in the


previous six years. In total, these Defendants sold almost 2.5 million Travelzoo shares for

proceeds of almost $190 million.

16. Lead Plaintiffs and members of the proposed Class suffered substantial harm by

Defendants' fraud, losing hundreds of millions of dollars.

JURISDICTION AND VENUE

17. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule lOb-S promulgated thereunder by

the SEC [17 C.F.R. § 240.1Ob-5].

18. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

19. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. § 1391(b). Travelzoo maintains its principal place of business in this District and

many of the acts and practices complained of herein occurred in substantial part in this District.

20. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

PARTIES

21. Lead Plaintiffs, as set forth in the certifications accompanying their motion to be

appointed as Lead Plaintiffs, incorporated by reference herein, purchased the common stock of

Travelzoo at artificially inflated prices during the Class Period and have been damaged thereby.

22. Additional named plaintiff International Union of Operating Engineers Local 30

Pension Fund ("IUOE") purchased the common stock of Travelzoo at artificially inflated prices

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during the Class Period and has been damaged thereby. IUOE's certification was submitted in

connection with its motion for appointment as lead plaintiff.

23. Defendant Travelzoo Inc. is a corporation organized under the laws of the state of

Delaware, which maintains its principal place of business at 590 Madison Avenue - 37th Floor,

New York, NY 10022.

24. Defendant Ralph Bartel is the founder of the Company. He founded Travelzoo in

May 1998, and has served as a Director since July 2010. Defendant Bartel signed the 2010 Form

10-K. He was also the Chairman of the Board of Directors from May 1998 to June 2010 and

Travelzoo's Chief Executive Officer and President from May 1998 to September 2008. Ralph

Bartel also indirectly owns 100% of Azzurro Capital Inc. Throughout the Class Period, Azzurro

Capital Inc., held 10.9 million shares of Travelzoo common stock through the Ralph Bartel 2005

Trust, representing approximately 66% of the Company's outstanding shares, as of March 31,

2011. During the Class Period, Defendant Ralph Bartel sold and/or disposed of over 2.436

million Travelzoo shares that he owned or controlled to reap illicit proceeds of over $ 186.536

million, while in possession of material adverse non-public information about the Company.

25. Defendant Christopher J. Loughlin ("Loughlin") is, and during the Class Period

was, Chief Executive Officer of the Company. During the Class Period, Defendant Loughlin

certified the Company's First Quarter 2011 Form 10-Q and 2010 Form 10-K. Also during the

Class Period, Defendant Loughlin sold 12,640 Travelzoo shares that he owned or controlled to

reap illicit proceeds of approximately $1.02 million, while in possession of material adverse non-

public information about the Company. Defendant Loughlin has served as Chief Executive

Officer since July 2010, after serving as Executive Vice President, Europe since May 2005.

Defendant Loughlin joined the Company in 2001.

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26. Defendant Wayne Lee ("Lee") was, during the Class Period, Travelzoo's Chief

Financial Officer. Defendant Lee announced that he was leaving the Company, to be replaced

by Glen Ceremony, in May 2011. During the Class Period, Defendant Lee signed and certified

the Company's First Quarter 2011 Form 10-Q and 2010 Form 10-K.

27. Defendant Kelly Urso ("Urso") was, during the Class Period, a director of

Travelzoo. Defendant Urso has served as a Travelzoo director since February 1999. Defendant

Urso signed the 2010 Form 10-K. During the Class Period, Defendant Urso sold approximately

$900,000 of Travelzoo stock while in the possession of nonpublic, material information.

28. The Defendants referenced above in ¶J 24-27 are referred to herein as the

"Individual Defendants."

29. The Individual Defendants, because of their positions with the Company,

possessed the power and authority to control the contents of Travelzoo' s annual and quarterly

reports, press releases, and presentations to securities analysts, money and portfolio managers

and institutional investors, i.e., the market. They were provided with copies of the Company's

reports and press releases alleged herein to be misleading prior to or shortly after their issuance

and had the ability and opportunity to prevent their issuance or cause them to be corrected.

Because of their positions with the Company, and their access to material non-public information

available to them but not to the public, the Individual Defendants knew that the adverse facts

specified herein had not been disclosed to and were being concealed from the public and that the

positive representations being made were then materially false and misleading. The Individual

Defendants are liable for the false and misleading statements pleaded herein.

30. Each of the Defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of Travelzoo securities by


disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme: (i) deceived the investing public regarding Travelzoo ' s business, operations,

and the intrinsic value of Travelzoo securities; (ii) enabled Defendants to artificially inflate the

price of Travelzoo shares; (iii) enabled Travelzoo insiders to sell almost $190 million dollars of

their privately held Travelzoo shares while in possession of material adverse non-public

information about the Company; and (iv) caused Plaintiffs and other members of the Class to

purchase Travelzoo securities at artificially inflated prices.

PLAINTIFFS' CLASS ACTION ALLEGATIONS

31. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or

otherwise acquired the securities of Travelzoo between March 16, 2011 and July 21, 2011,

inclusive (the "Class") and who were damaged thereby. Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which Defendants have or had a controlling interest.

32. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Travelzoo common shares were actively traded on

the Nasdaq. As of May 5, 2011, the Company had over 16.461 million shares of common stock

issued and outstanding. While the exact number of Class members is unknown to Plaintiffs at

this time and can only be ascertained through appropriate discovery, Plaintiffs believe that there

are hundreds or thousands of members in the proposed Class. Record owners and other members

of the Class may be identified from records maintained by Travelzoo or its transfer agent and

may be notified of the pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions.

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33. Plaintiffs' claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants' wrongful conduct in violation of

federal law that is complained of herein.

34. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

35. Common questions of law and fact exist as to all members of the Class and

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

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants'

acts as alleged herein;

(b) whether statements made by Defendants to the investing public

during the Class Period misrepresented material facts about the business and operations of

Travelzoo; and

(c) to what extent the members of the Class have sustained damages

and the proper measure of damages.

36. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

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SUBSTANTIVE ALLEGATIONS

Background of the Company


Bartel. Travelzoo informs over 23 million subscribers worldwide, as well as millions of website

users, about travel, entertainment and local deals available from thousands of companies. The

Company's deal experts source, research and test-book offers, recommending only those that

meet Company standards. Travelzoo provides travel companies, entertainment companies, and

local businesses with a fast, flexible, and cost effective way to reach millions of consumers.

Travelzoo' s revenues are generated primarily from advertising fees through the Company's core

travel branch.

38. The Company's publications and products include the Travelzoo websites

(www.travelzoo.com , www.travelzoo.ca , www.travelzoo.co.uk , www.travelzoo.de ,

www.travelzoo.es , www.travelzoo.fr , among others), the Travelzoo Top 20 e-mail newsletter,

the Newsflash e-mail alert service, the SuperSearch pay-per-click travel search tool, and the

Travelzoo Network, a network of third-party websites that list deals published by Travelzoo.

Travelzoo also operates Fly.com , a travel search engine that allows users to quickly and easily

find the best prices on flights from hundreds of airlines and online travel agencies.

39. More than 2,000 companies use Travelzoo's services, including American

Airlines, Avis Rent A Car, British Airways, Harrah' s Entertainment, Expedia, Fairmont Hotels

and Resorts, Interstate Hotels & Resorts, JetBlue Airways, Kimpton Hotels, Liberty Travel,

Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels & Resorts Worldwide,

United Airlines, and Virgin Atlantic.

40. Travelzoo's principal revenues, which it receives through its core travel business,

are advertising revenues, and consist primarily of listing fees paid by travel companies,

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entertainment companies and local businesses to advertise their offers on Travelzoo's media

properties. Listing fees are based on audience reach, placement, number of listings, number of

impressions, number of click-throughs, number of referrals, or percentage of the face value of

vouchers sold. Advertising insertion orders are typically for periods between one month and

twelve months and are not automatically renewed.

Local Deals Is Launched

41. In August 2010, the Company expanded its business, launching Local Deals, a

new service that allows Travelzoo subscribers to purchase vouchers for deals from local

businesses such as spas and restaurants through the Travelzoo website. Vouchers are redeemable

at the local businesses during the promotional period. The Company receives a percentage of the

face value of the vouchers. In the Local Deals business, Travelzoo contracts with local

businesses to offer deep discounts for potential customers (Travelzoo's existing subscribers).

Then Travelzoo sells the discounts (in the form of a voucher for goods or services) and keeps

between 30 to 40% of total revenue the Company sells as commission.

42. Unlike revenue Travelzoo receives through its core travel business, which is

straight advertising revenue paid up front by merchants, Local Deals revenue is dependent on the

amount of vouchers sold.

Growth Has Been Travelzoo's Driver For Many Years

43. The Company has repeatedly emphasized the necessity of growth for Travelzoo.

For example, Travelzoo stated in its Form 10-K for fiscal year 2010, filed on March 16, 2011:

Since the commencement of our operations, we have experienced a period of rapid growth. In order to execute our business plan, we must continue to grow significantly. As of December 31, 2010, we had 255 employees, up from 193 employees as of December 31, 2009. We expect that the number of our employees will continue to increase for the foreseeable future. (Emphasis added).

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44. Travelzoo has also repeatedly stated that its growth strategy involved continued

growth in revenue through both core travel and Local Deals. For example, in the Third Quarter

2010 Form 10-Q, filed on November 9, 2010, the Company stated:

Growth Strategy

Our growth strategy has three main elements:

• International expansion: We want to grow our revenue and operating profit through replicating the Travelzoo business in attractive international markets in Europe and in North America. We want to develop a strong competitive position through building a strong global brand and unique global content.

• Expand scope of the Travelzoo business: We want to grow our revenue and operating profit through expanding the Travelzoo product offerings and content into entertainment and lifestyle (e.g., Broadway shows, sporting events, restaurants and spas).

• Fly.com: We want to grow revenue and operating profits through building up Fly.com , our new meta-search engine for airfares. We have identified meta-search as an opportunity with attractive economics and great synergies with Travelzoo.

We launched the Travelzoo business in the U.K. in 2005, in Canada in 2006, in Germany in 2006, in France in 2007, and in Spain in 2008. We began developing and offering entertainment content and related advertising services in 2008. We launched Fly.com in February 2009. In August 2010, we launched Local Deals, a new service that allows our subscribers to purchase vouchers for deals from local businesses such as spas and restaurants. The vouchers are then redeemable at the local businesses during the promotional period in which the deals are offered. (Emphasis added).

45. Though not mentioned by name, the reference above to "Broadway events,

sporting events, restaurants, and spas" refers to Local Deals offers.

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46. Defendants made substantially similar statements about Travelzoo' s growth

strategy, and with particular reference to revenue growth, in the August 9, 2010 Form 10-Q, May

10, 2010 Form 10-Q, and May 6, 2010 Form 10-K/A.

47. Defendants did not mention Local Deals offers in the filings listed in the previous

paragraph because Local Deals was only launched in August 2010, and in its first quarter of

operations Local Deals netted only a small amount of revenue.

Local Deals' Role in Travelzoo's Growth

48. In the first quarter of its operation, which was the third quarter of 2010, Local

Deals started slowly, with gross revenue of approximately $800,000.

49. In a conference call for the third quarter of 2010, held with analysts on October

20, 2010, Defendant Loughlin discussed the launch of Local Deals:

Slide 23 focuses on our new business, Local Deals. We established Local Deals as a separate entity, Travelzoo Local Inc., a wholly owned subsidiary of Travelzoo Inc. on Aug 24 to handle all aspects of publishing and selling Local Deals' vouchers. Local Deals is generally a new type of content for Travelzoo and include restaurants, spas and local festivals. We allure our subscribers to these Local Deals within their area, and then they buy a voucher from a merchant via the Travelzoo Web site.

We report the revenue from Local Deals on a net basis. In Q3, we published 44 deals in 11 cities most of them were published in September, and we sold approximately 25,000 vouchers, our average selling price is $33. Overall, revenue from Local Deals in Q3 was not significant, and we generated a small loss from the business as we incurred start-up costs. One notable aspect of Local Deals is that they can go viral very quickly, and here you can see some Twitter announcements where people are talking about Local Deals, and this is partly due to the fact that they are local by nature so locally interesting, and also that we (inaudible) that they have to reach in order for the deal to be activated.

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50. On February 3, 2011, Defendant Loughlin discussed Local Deals with analysts on

the fourth quarter 2010 conference call. By its second quarter of operations, the fourth quarter of

2010, Local Deals had grown significantly, with gross revenues up approximately 1000%:

Revenues accelerated in North America year-over-year to 14%. Within that growth rate, we saw excellent growth in our Local Deals business where we far exceeded our expectations for the quarter, but we also saw a decline in revenues from SuperSearch and Fly. corn versus the previous quarter, as we decreased marketing spend in these search businesses. We did this in anticipation of greater investment in Local Deals.... [S]o the growth in the gross [revenue] [for Local Deals] was somewhere in the region of between eight to nine times. So just shy of 10 times growth quarter-over quarter. So just under 1000% growth.

51. Local Deals continued to grow. On March 1, 2011, Wedbush analyst Edward

Woo wrote a report stating:

Travelzoo continues to quickly ramp up its Local Deals business, generating an estimated $2.1 million in net revenues in February. This compares with estimates net revenues of $1.3 million in January, $1.5 million in December, $1 million in November, and $650,000 in October.

Getaways

52. Travelzoo launched Getaways, a subset of its Local Deals Branch, in March 2011.

However, as noted, Defendants did not disclose the existence of Getaways until two months later

on June 1, 2011. Getaways deals usually include a night or two at a relatively high-end hotel or

resort within a two-hour drive or short flight from subscribers' homes and include a fine-dining

experience or resort credit plus other extras.

53. Travelzoo originally offered 40 Getaways in locations across North America and

Europe, including: The Borgata in Atlantic City, Essex Resort & Spa in Vermont, Timberline

Lodge in Oregon, Vintners Inn in Santa Rosa, Portola Hotel & Spa in Monterey Bay, Ravella at

Lake Las Vegas, The Ellis Hotel in Atlanta, Woodmark Hotel on Lake Washington near Seattle,

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Sedona Rouge Hotel & Spa, The Canary Hotel in Santa Barbara, The Keating Hotel by

Pininfarina in San Diego, Cambria Pines Lodge in California, the Dundee Resort & Golf Club in

Nova Scotia, Solis Lough Eske Castle in Donegal, Ireland, Hotel Termes Carlemany in Andorra,

the Radisson Blu in Cannes, Hotel Imperator Concorde Nimes, France, La Clairiere Bio et Spa

Hotel in Alsace, France, l'Hotel Roussi'hotel in France, The Feathers in Cotswolds, England,

Hotel Villa Lutece Port Royal in Paris, Pestana Hotel Berlin Tiergarten, Furstenhof Celle in

Hanover, Schlosshotel Lerbach near Koln, Princeotel in Barcelona, Royal Spa Kitzbuhel Hotel in

Austria and Ryad Mogador Agdal in Marrakesh.

54. As with the other Local Deals, Getaways deals are available for a set duration.

Subscribers purchase a voucher on a Travelzoo website and redeem them at the hotel or resort.

For example, Travelzoo offered a one-night stay today for two people in the four-star The

Chelsea Hotel in Atlantic City, N.J., with a 3-course dinner for two at The Chelsea Prime

restaurant for $189. Also included are spa and gym passes, free Wi-Fi and chairs, towels and use

of umbrellas at the beach. That price, which Travelzoo touted as a 56% discount, was good for

Sunday to Thursday arrivals through Sept. 1, 2011.

55. Unlike a hotel stay listed in Travelzoo's Top 20 emails, Getaways were targeted

to subscribers in particular markets and vouchers are purchased on Travelzoo.com instead of

referring customers to the hotel website for bookings. Defendant Christopher Loughlin stated

that Getaways were geared toward subscribers who might not have considered staying at a

nearby hotel, but would be tempted to do so if the offer is right.

Unbeknownst to Investors, Getaways Cuts Into Travelzoo's Core Travel Revenues and Growth



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59. Defendants never disclosed to investors the cannibalization issues or how they

could affect Travelzoo growth, revenues and earnings.

60. Defendant Loughlin admitted after the Class Period that he was aware - back in

March 2011 - of the cannibalization issue but, nonetheless, proceeded with Getaways:

[W]e took a decision back in April. We ran a test in April - actually ran a test in March for the Getaways. And some folks will probably remember there was a Napa Valley deal that all of sudden went through the roof. And we just said to ourselves, okay, do we attack ourselves, or do we just ignore this, and what we did is that right, let's roll it out, see what happens. (Emphasis added).

61. Further, upon information and belief, throughout the Class Period, Defendants

were well aware that Getaways revenues were cutting into core travel revenues and growth

because they had real-time access to up-to-date revenue information through software utilized by

the Company.

62. Defendant Loughlin also admitted that revenue cannibalization caused lower core

travel revenue growth. As explained below, certain analysts put the rest together, realizing that

the revenue cannibalization had also, in part, caused lower overall revenues.

Defendants Disclose Getaways' Cannibalization of Core Travel Revenues and Growth

63. On July 21, 2011, the last day of the Class Period, Defendants announced lower

than expected revenues and earnings per share. On that day, Defendants announced that

Travelzoo had revenues of $37.6 million, below the analyst consensus of $40.2 million, and

earnings per share of $30, well below analyst consensus of $38. As a result, Travelzoo stock

collapsed by over 30%, from approximately $90 per share to $60 per share in morning trading on

the Nasdaq, after touching a low of $57.48 per share.

64. The $2.6 million in lower revenues was a material amount in the context of

Travelzoo's earnings per share for the second quarter. Indeed, if the Company had received the

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expected $2.6 million in revenues, its second quarter earnings per share would have been near

the analyst consensus of $38 per share.

65. In the conference call with analysts following the earnings announcement, after

several analysts honed in on the cannibalization issues, Defendant Loughlin admitted that

cannibalization of core travel revenues by Getaways caused lower core travel growth in the

second quarter of 2011. But because, inter alia, the core travel business netted, in certain

circumstances, superior revenue to Getaways' voucher system, lower core travel growth meant

lower overall growth and lower overall revenues.

66. Further, Loughlin admitted that he was aware of the cannibalization issue back in

March 2011 when Getaways was launched. Investors, on the other hand, were not aware of such

issue until after Travelzoo stock collapsed, in part, due to the disclosure of the lower than

expected revenues and core travel growth caused by cannibalization.

Defendants' Materially False and Misleading Statements Made During the Class Period

67. On March 16, 2011, the first day of the Class Period, Travelzoo issued its annual

report on Form 10-K for the fiscal year 2010. The report was signed by Defendants Bartel,

Loughlin, Lee, and Urso and certified by Defendants Loughlin and Lee. The 2010 Annual

Report discussed Travelzoo competitors - relating both to core travel and Local Deals - at great

length:

Competition

We face intense competition. We compete for advertising dollars with large Internet portal sites such MSN and Yahoo! that offer listings or other advertising opportunities to travel, entertainment and local companies. We compete with search engines like Google and Bing that offer pay-per-click listings. We compete with travel meta-search engines like Kayak and online travel and entertainment deal publishers. We compete with large online travel agencies like Expedia and Priceline that also offer advertising placements and

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capture consumer interest. We compete with companies like Groupon and LivingSocial that sell vouchers for deals from local businesses such as spas, restaurants and activity companies. In addition, we compete with newspapers, magazines and other traditional media companies that operate websites which provide advertising opportunities. We expect to face additional competition as other established and emerging companies, including print media companies, enter our market. We believe that the primary competitive factors are price, performance and audience quality.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger advertiser bases than we do. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships to expand their businesses or to offer more comprehensive solutions.

New technologies could increase the competitive pressures that we face. The development of competing technologies by market participants or the emergence of new industry standards may adversely affect our competitive position. Competition could result in reduced margins on our services, loss of market share or less use of our products by our advertisers and consumers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business could be materially adversely affected.

68. These statements were materially false and misleading when made because, inter

a/ia, Defendants failed to disclose that, with the March 2011 advent of Getaways, Travelzoo was

essentially competing with itself in that Getaways would cannibalize revenues from the

Company's core travel branch and, thus, impair Travelzoo' s revenue growth and/or earnings

growth.

69. The 2010 Annual Report contained similar statements in the "Risk Factors"

section. But instead of disclosing the known risk of revenue cannibalization to investors, it

concealed it by referring to Travelzoo competition with outside companies, rather than within its

own branches:

Intense competition may adversely affect our ability to achieve or maintain market share and operate profitably.

20


We face intense competition. We compete for advertising dollars with large Internet portal sites, such as MSN and Yahoo! that offer listings or other advertising opportunities to travel, entertainment and local companies. These companies have significantly greater financial, technical, marketing and other resources and larger advertiser bases. We compete with search engines like Google and Bing that offer pay-per-click listings. We compete with travel meta-search engines like Kayak and online travel and entertainment deal publishers. We compete with large online travel agencies like Expedia and Priceline that also offer advertising placements and capture consumer interest. We compete with companies like Groupon and LivingSocial that sell vouchers for deals from local businesses such as spas and restaurants. In addition, we compete with newspapers, magazines and other traditional media companies that operate websites which provide online advertising opportunities. We expect to face additional competition as other established and emerging companies, including print media companies, enter the online advertising market. Competition could result in reduced margins on our services, loss of market share or less use of Travelzoo by advertisers and consumers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business could be materially adversely affected.


a/ia, Defendants failed to disclose that Travelzoo was now essentially competing with itself in

that Getaways would cannibalize revenues from the Company's core travel branch and, thus,

impair Travelzoo's revenue growth and/or earnings growth. See ¶J56-66.

71. The 2010 Annual Report also discussed the pivotal importance of advertising

revenues:

Our current revenue model depends on advertising fees paid primarily by travel, entertainment and local companies. If current advertisers decide not to continue advertising their offers with us and we are unable to replace them with new advertisers, our business may be adversely affected.


a/ia, Defendants failed to disclose that Travelzoo was now essentially competing with itself,

adversely affecting advertising revenues by Getaways' cannibalization of revenues from the

Company's core travel branch and, thus, impairing Travelzoo's revenue growth and/or earnings

growth. See ¶J56-66.

21


73. The Annual Report also stated the paramount importance of growth to Travelzoo:

Since the commencement of our operations, we have experienced a period of rapid growth. In order to execute our business plan, we must continue to grow significantly. (Emphasis added).

74. The 2010 Annual Report also stated that "[w]hen evaluating the financial

condition and operating performance of the Company, management focuses on. . . [g]rowth in

revenues in the absolute and relative to the growth in reach of the Company's publications."

75. The 2010 Annual Report demonstrated such revenue growth as it reported

steadily increasing revenues since 2006. Revenues were as follows: 2006 - $69.5 million; 2007

—$78.9 million; 2008 —$80.8 million; 2009 —$93.9 million; and 2010 —$112.7 million.

76. In the 2010 Annual Report, Defendants described Travelzoo's growth strategy:

Growth Strategy

Our growth strategy has two main elements:


• Expand scope of Travelzoo business: We want to grow our revenue and operating profit through expanding the Travelzoo product offerings and content into entertainment (e.g., Broadway shows, sporting events), through our Local Deals e-mail alert service and through Fly.com . (Emphasis added).

77. The highlighted statement was materially false and misleading when made

because, inter a/ia, Defendants failed to disclose that, since Travelzoo was now essentially

competing with itself, part of the growth fueled by Local Deals, i.e., Getaways, was at the

expense of growth and revenue at the Company's core travel business, and would actually impair

Travelzoo's revenue growth and/or earnings growth. See ¶56-66.

22


78. On April 21, 2011, Defendants published a release announcing results for the first

quarter of 2011, the period ended March 31, 2011:

Travelzoo Reports First Quarter 2011 Results

NEW YORK, April 21, 2011 -- Travelzoo Inc. (NASDAQ: TZOO):

• Revenue of $37.0 million, up 30% year-over-year

• Non-GAAP net income of $6.0 million, up 144% year-over year

• Non-GAAP earnings per share of $0.37, compared to $0.15 in the prior year period

• GAAP net loss of $14.0 million; GAAP loss per share of $0.85

• Cash flow from operations of $10.7 million

Travelzoo Inc., a global Internet media company, today announced financial results for the first quarter ended March 31, 2011, with revenue of $37.0 million, an increase of 30% year-over-year. Adjusted operating profit was $10.0 million. Adjusted net income was $6.0 million, with adjusted diluted net income per share (EPS) of $0.37, up from $0.15 in the prior-year period. Adjusted operating profit, adjusted net income and adjusted diluted earnings per share for the first quarter ended March 31, 2011 exclude a one-time expense item of $20.0 million related to the settlement of the State of Delaware unclaimed property review.

79. In addition to the foregoing, the April 21, 2011 release also quoted Defendant

Loughlin, in part, as follows:

"We kicked off 2011 with record revenues and record adjusted operating income. Subscribers grew by over 1 million, the second best performance in our company's history," said Chris Loughlin, CEO of Travelzoo. "We doubled adjusted operating income year-over-year as we continued to ramp up Local Deals, which are now live in 48 markets in 6 countries. North America revenues grew at the fastest pace in over 4 years. Europe saw the highest quarterly subscriber growth ever and returned its first significant quarterly profit. We also reached a settlement agreement for a previously disclosed State of Delaware

23


escheatment claim, incurring a one-time cash expense. (Emphasis added).

80. The highlighted statements in paragraph 79 were materially false and misleading

when made because, inter a/ia, Defendants failed to disclose that, since Travelzoo was now

essentially competing with itself, part of the revenues received through Local Deals were at the

expense of the Company's core travel business, and would thus impair Travelzoo's revenue

growth and/or earnings growth. See ¶J56-66.

81. Travelzoo also issued a "First Quarter Performance and Growth Strategy

Overview" (the "First Quarter Presentation") on April 21, 2011, which the Company presented

to analysts for the conference call of that day. Travelzoo also published the First Quarter

Presentation on its website. The First Quarter Presentation demonstrates the importance to

Defendants of growth in Local Deals revenues:

Our growth strategy is built on two key pillars that include continued audience growth and product expansion.

1. Rapid audience growth:

Higher penetration in existing markets

Develop new international markets

Management Focus for 2011

Rapidly grow Local Deals revenues & income

Maintain quality leadership position by publishing outstanding high-quality deals

Expand into additional U.S., Canadian, and European cities

Increase revenue per market

24


(Emphasis added).

82. The highlighted statements were materially false and misleading when made


competing with itself, part of the revenues received, and growth achieved, through Local Deals

were, as described above, at the expense of the Company's core travel business, and would thus


83. On April 21, 2011, apparently in response to Travelzoo' s announcement, Think

Equity analyst Atul Bagga issued a report raising second quarter estimates to $39 million, up

from $33.9 million, and earnings per share estimates to $38 from $.29.

84. Immediately following the publication of its April 21, 2011 release announcing

results for the first quarter of 2011, shares of Travelzoo rallied almost $20.00 per share, or

almost 27%, to $93.70 per share. That day, Forbes.com reported that Local Deals had largely

caused the positive first quarter results:

Travelzoo Soars; Qi Crushes Estimates On Strong Deals Biz (Updated)

Travelzoo (TZOO) shares are trading sharply higher after the online travel information provider posted better-than-expected first quarter results.

For the quarter, the company posted revenue of $37 million and non-GAAP profits of 37 cents a share, well ahead of the Street consensus at $33.4 million and 28 cents. Revenue was up 30% from a year ago.

The company said North American revenue was up 23%; European revenue was up 53%. Travelzoo said it had 19.9 million unduplicated subscribers to its e-mail newsletters, up 6% sequentially and 12% from a year ago.

On the strong results, TZOO shares have spiked $19.83, or 26.8%, to $93.70.

25


Update: Clearly, one of the big drivers for the company in the quarter was its LocalDeals business, a new unit that has jumped into Groupon territory. In an interview with Forbes this morning, CEO Chris Loughlin noted that gross revenue from the business was $16.1 million in the quarter, up from $8 million in the December quarter, and $800,000 the quarter before that; he won't say what percentage of the gross total is included in the company's revenues, but notes that margins on individual deals have been running in the 30%-50% range depending on the merchant. Loughlin notes that the company's deals business is now operating in 48 markets and six countries; he says the goal is to add about 15 additional markets every quarter. In the long run, he adds, LocalDeals could be as big an opportunity as the company's core media business. (Emphasis added).

85. Defendants also held a conference call with analysts on April 21, 2011. In that

call, Defendant Loughlin stated that Local Deals was a driver of Travelzoo ' s growth strategy:

Let's now move on to Travelzoo's growth strategy. On slide 14, I summarize the growth strategy. On the X axis, we are growing the number of subscribers that engage with the Travelzoo brand. We show our second-highest increase in new subscribers in Qi 2011 and now have just under 20 million subscribers to our publications in Europe and North America.

Along the Y axis, we are growing the revenue per subscriber, and Local Deals has become a substantial driver here. You can see already that we increased our revenue per subscriber from $6.70 to $7.80 from Q4 to Qi....

We believe that as we continue to grow aggressively in North America, we have a tremendous opportunity there, and Europe presents an enormous opportunity ahead. (Emphasis added).


because, inter cilia, Defendants failed to disclose that, since Travelzoo was now essentially

competing with itself, part of the growth of Local Deals was, as described above, at the expense

of the Company's core travel business, and would thus impair Travelzoo's revenue growth

and/or earnings growth. See ¶'J56-66.

26


87. In the days that followed, shares of the Company continued to rally. As evidence

of this, on April 25, 2011, the MotleyFool.com reported, in part, the following:

Travelzoo Shares Popped Again: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes - just in case they're material to our investing thesis.

What: Shares of travel discount company Travelzoo (Nasdaq: TZOO) are shooting higher again today, one trading day after enjoying a nice earnings bump.

So what: There are a few things at work today driving shares higher. There's a little momentum left from the earnings spike but Benchmark Co. analyst Frederick Moran fueled the fire upgrading the stock to a buy and slapping a $123 price target on shares...

88. Also on April 25, 2011, Craig Hallum analyst Eric Martinuzzi raised revenue

expectations for the second quarter to $41.4 million and earnings per share to $.42.

89. Taking full advantage of the artificial inflation in the price of Company shares,

caused as a result of the publication of Defendants' false and misleading statements, between

April 26 and April 29, 2011, Defendant Ralph Bartel, alone and/or through entities he controlled,

sold over 625,000 shares of Company stock he owned and/or controlled to realize gross proceeds

of over $55 million.

90. Days later, on May 2, 2011, Defendant Loughlin sold all of his Travelzoo shares -

100% - to reap illicit gross proceeds of over $1 million.

91. As shares of the Company continued to trade at levels artificially inflated as a

result of the publication of Defendants' materially false and misleading statements, on May 10,

2011, Travelzoo CEO Chris Loughlin presented at the Jefferies 2011 Global Technology,

Internet, Media & Telecom Conference, at the Four Seasons Hotel in New York City.

27


92. Also on May 10, 2011, Defendants filed with the SEC the Company's Form 10-Q

for the First Quarter ended March 31, 2011, signed by Defendant Lee and certified by

Defendants Lee and Loughlin. The First Quarter Form 10-Q contained similar misstatements to

those in the 2010 Annual Report concerning competition:


We face intense competition. We compete for advertising dollars with large Internet portal sites, such as America Online, MSN, and Yahoo!, that offer listings or other advertising opportunities for travel and entertainment companies. These companies have significantly greater financial, technical, marketing, and other resources and larger client bases. We compete with search engines like Google and Yahoo! Search that offer pay-per-click listings. We compete with travel meta-search engines and online travel deal publishers. We compete with large online travel agencies like Expedia and Priceline that also offer advertising placements. We compete with companies like Groupon and LivingSocial that also sell vouchers for deals from local businesses such as spas and restaurants. In addition, we compete with newspapers, magazines, and other traditional media companies that operate websites which provide online advertising opportunities. We expect to face additional competition as other established and emerging companies, including print media companies, enter the online advertising market. Competition could result in reduced margins on our services, loss of market share, or less use of Travelzoo by travel companies, entertainment companies, and consumers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business could be materially adversely affected.



that Getaways was cannibalizing revenues from the Company's core travel branch and, thus,

impairing Travelzoo' s revenue growth and/or earnings growth. See ¶J56-66.

94. The First Quarter Form 10-Q also stated, in pertinent part:

Revenues

Our total revenues increased to $37.0 million for the three months ended March 31, 2011 from $28.5 million for the three months ended March 31, 2010. This represents an increase of $8.4 million or 30%. $5.2 million of the increase in revenues came

PW


from our operations in North America, which had an increase of 23% in revenues year-over-year and was attributed primarily to a $5.1 million increase in revenues from our publications, which includes the Travelzoo website, the Top 20 e-mail newsletter, the Newsflash e-mail alert service, and the Local Deals e-mail alert service. $3.3 million of the increase in revenues came from our operations in Europe, which had an increase of 53% in revenues year-over-year, and was attributed primarily to a $3.3 million increase in revenue from our publications, which includes the Travelzoo website, the Top 20 e-mail newsletter, the Newsflash e-mail alert service and the Local Deals e-mail alert service.


because, inter alia, Defendants failed to disclose that, since Travelzoo was now essentially

competing with itself, part of the revenues received through Local Deals were, as described

above, at the expense of the Company's core travel business, and would thus impair Travelzoo's

revenue growth and/or earnings growth. See ¶J56-66.

96. Defendants also continued to tout Travelzoo's growth strategy in the First Quarter

2011 Form 10-Q:

Growth Strategy




97. These statements were materially false and misleading because Defendants failed

to disclose that, because Travelzoo was now essentially competing with itself, part of the

Company's growth fueled by Local Deals was, as described above, at the expense of the

29


Company's core travel business, and would thus impair Travelzoo's revenue growth. See ¶'j56-

66.

98. Defendants also continued their statements about the paramount importance of

growth to Travelzoo in the First Quarter Form 10-Q: "In order to execute our business plan, we

must be able to grow significantly."

99. On May 11, 2011, ten days after he sold 100% of his Travelzoo shares, Defendant

Loughlin appeared on Jim Cramer's Mad Money making glowing statements about Travelzoo's

growth and future health: "[Travelzoo has a] 50% growth rate in Europe. You know, there is a

tremendous opportunity."

100. On May 16, 2011, Travelzoo published a press release about Local Deals:

Travelzoo Subscribers in Europe Rapidly Adopt Local Deals: Sales Triple in the First Half of Q2

LONDON, May 16, 2011 /PRNewswire/ -- Travelzoo Inc. (NASDAQ: TZOO), a global Internet media company, today announced that its European subscribers bought $3.4 million in Local Deals during the first 45 days of the second quarter, up 196% from the first 45 days in the first quarter of 2011. Gross sales of Local Deals in Europe, halfway through the second quarter, are only $400,000 shy of the total gross revenues for the entire first quarter.

"We are pleased to see the rapid adoption of Local Deals among our European subscribers," said Chris Loughlin, Chief Executive Officer. "We see this as a clear validation of our international strategy, in that we can quickly take a product that is already very successful in North America and rapidly roll it out into other markets where we already have a large subscriber base."

Travelzoo has published 78 deals in Europe so far this quarter, generating average gross revenue of $43,600 per deal, well ahead of Travelzoo's average gross revenue per deal of $34,000 in Qi. Two deals in Europe in recent weeks each yielded more than $225,000 in gross revenue: A dining experience at Gordon Ramsay's Maze in London, which holds a Michelin-star rating, sold 2,916 covers, and a getaway at a 4-star Berlin hotel generated 2,379 room nights.

30


Travelzoo's fastest growing European Local Deals market is now Germany, where gross Local Deals revenue through 15 May was $810,000. This is up from $10,000 during the same period in the first quarter and 500% ahead of the full first quarter gross revenues of $130,000. The UK continues to be Travelzoo's largest Local Deals market in Europe, generating $2.2 million in gross revenue in the second quarter to 15 May, up 94% when compared to the first half of Qi. France and Spain are also trading well in excess of 100% ahead of Q on a like-for-like basis.

Glen Drury, Senior Vice President of Local Deals in Europe commented, "The recent results in London and Berlin were outstanding, but we are seeing similar results across the region. For example, a deal at the trendy Ice Bar on Montmartre in Paris just took 850 covers in 5 days. While it is very exciting to see these big cities light up, we are also very impressed with the response we are seeing in markets like Chester, Kent, Ludlow, Leipzig, Mainz and other lesser known cities across Europe."

As more and more Travelzoo subscribers start to enjoy their local experiences, merchants are commenting on the quality of Travelzoo's subscriber base and Travelzoo's quality leadership position in the local deals market. Ms. Cat Spencer, Head of Marketing at the Albannach, a high-end restaurant in Trafalgar Square, which received more than 1,000 covers from Travelzoo, said, "Travelzoo has been the best marketing campaign we have run in the past year. Not only did it drive covers through the door, but guests tended to spend more." Calum Colquhoun, General Manager, De Vere Daresbury Park near Manchester also commented, "We have used other companies to sell similar local promotions and only received a fraction of the sales. Added to that, the whole process was very easy for us and for the customers who booked."

Travelzoo has now published Local Deals in 28 markets across Europe as well as an additional 10 deals in getaway destinations such as Ireland, Morocco, Cote d'Azur and Biarritz.

To view the latest Local Deals from Travelzoo, visit www.travelzoo.co.uk , www.travelzoo . de, www.travelzoo.fr or www.travelzoo.es and click on Local Deals.



competing itself, part of the growth of, and revenues received through, Local Deals were, as

31


described above, at the expense of the Company's core travel business, and would thus impair

Travelzoo's revenue growth. See ¶J56-66.

102. On May 17, 2011, Defendants announced the imminent departure of Defendant

CFO Lee:

Travelzoo Appoints Glen Ceremony as Chief Financial Officer

NEW YORK--(BUSINESS WIRE)--Travelzoo Inc. (NASDAQ: TZOO), a global Internet media company, today announced that Glen Ceremony will become Chief Financial Officer on June 15, 2011. Mr. Ceremony joins Travelzoo from eBay, where he serves as Corporate Controller. Wayne Lee, Travelzoo's current Chief Financial Officer, will stay at the company through the end of July 2011 to assist with the transition. After five years in the role, Mr. Lee plans to take time off with his family and to pursue other opportunities.

"We are delighted that Glen has decided to join the team," said Chris Loughlin, Travelzoo' s Chief Executive Officer, "With over 20 years experience within high-growth companies and six and a half years within eBay's financial organization, Glen comes with a wealth of Internet advertising and ecommerce experience. Glen also brings a new dimension of strategic financial leadership to our business at a time when our growth rate is accelerating and we are becoming a larger global organization. The transition is of course bitter-sweet, Wayne has done a tremendous job in guiding Travelzoo's financial organization over the past 5 years and he will remain a good friend."

103. Between May 25, 2011 and May 31, 2011, Defendant Bartel sold approximately

920,000 Travelzoo shares for gross proceeds of approximately $68 million.

104. Defendants continued to artificially inflate the price of Company shares by

presenting at investment conferences across the country, hosted by the nation's leading

brokerage houses. For example, on June 1, 2011, Defendant Loughlin presented at the 8th

Annual Craig-Hallum Institutional Investor Conference, at the Radisson Plaza Hotel in

Minneapolis. A week later, Defendant Loughlin also appeared at the 6th Annual Needham

Internet & Digital Media Conference, on June 7, 2011, at the Jumeirah Essex House in New

32


York City. Two weeks after that, Defendant Loughlin presented at the Goldman Sachs Second

Annual dotCommerce Day, at the Le Parker Meridien Hotel in New York City.

105. On June 1, 2011, Defendants specifically mentioned Getaways for the first time.

On that date, Defendants disseminated a press release trumpeting Getaways' success:

Travelzoo Getaways Delivers 28,000 Room Nights for 40 Upscale Resorts

NEW YORK, June 1, 2011 /PRNewswire/ -- Travelzoo Inc. (NASDAQ: TZOO), a global Internet media company, announced today that 40 upscale resorts have sold more than 28,000 incremental room nights through its new Travelzoo Getaways program. Travelzoo began testing the Getaways model in March; the new program alerts Travelzoo subscribers to upscale getaways within a two-hour drive or short flight from their home airport. Getaways typically include one or two nights at an upscale resort, with a fine-dining experience or a flexible resort credit to encourage Travelzoo subscribers to experience the resort's full amenities. Travelzoo Getaways uses the same booking mechanism as Travelzoo Local Deals, where Travelzoo subscribers purchase a voucher from the resort through the Travelzoo website and then book their stay directly with the property.

Forty upscale resorts have now participated in Travelzoo Getaways across North America and Europe, including: The Borgata in Atlantic City, Essex Resort & Spa in Vermont, Timberline Lodge in Oregon, Vintners Inn in Santa Rosa, Portola Hotel & Spa in Monterey Bay, Ravella at Lake Las Vegas, The Ellis Hotel in Atlanta, Woodmark Hotel on Lake Washington near Seattle, Sedona Rouge Hotel & Spa, The Canary Hotel in Santa Barbara, The Keating Hotel by Pininfarina in San Diego, Cambria Pines Lodge in California, the Dundee Resort & Golf Club in Nova Scotia, Solis Lough Eske Castle in Donegal, Ireland, Hotel Termes Carlemany in Andorra, the Radisson Blu in Cannes, Hotel Imperator Concorde Nimes, France, La Clairiere Bio et Spa Hotel in Alsace, France, l'Hotel Roussi'hotel in France, The Feathers in Cotswolds, England, Hotel Villa Lutece Port Royal in Paris, Pestana Hotel Berlin Tiergarten, Furstenhof Celle in Hanover, Schlosshotel Lerbach near Koln, Princeotel in Barcelona, Royal Spa Kitzbuhel Hotel in Austria and Ryad Mogador Agdal in Marrakesh.

Chris Loughlin, Travelzoo's Chief Executive Officer, said: "The results from the first 40 Getaways clearly indicate that our subscribers across the globe like our new Getaways program. Resorts are also very pleased that we can now showcase the complete resort experience, including rooms, restaurants and spas. It is also very compelling for resorts to offer these experiences to those Travelzoo subscribers who live within their local drive markets, these are

33


travelers who might not normally consider staying at a local resort, but if the offer is attractive enough, they are happy to take a leisure break, even during slower off-peak periods."

Emre Erkul, Director of Marketing, Borgata Hotel Casino & Spa, said: "Travelzoo's new Getaways program helped us sell over 1,000 midweek packages for last-minute stays in June. Most of the guests are new to the property and coming from our primary drive markets, Philadelphia, New Jersey and New York. Unlike other hotel marketing programs, Getaways allowed us to create a customized package that showcased the Borgata's exceptional fine dining and entertainment experiences, not just a discounted room rate. This promotion has been extremely positive for the brand and has exposed many new customers to Borgata."

Sandra Vivas, General Manager for The Keating Hotel by Pininfarina, explained, "We learned more about Getaways after we saw how successful our restaurant was with a Travelzoo Local Deal promotion. What we liked most about the program was the quality of the guests; Travelzoo definitely has a more mature crowd who are not afraid to spend. That's honestly why we did the Getaway promotion, because we knew what type of guests we would attract."

Jim Glanville, General Manager for The Essex Resort and Spa, shared: "The Getaways program afforded us the opportunity to fill distressed inventory during a transitional season while having the unexpected benefit of incremental spend exceeding $100 per visit on top of the package that already included spa and dining credits. Nearly 100 percent of the guests that were attracted through this promotion were first-time visitors and likely would not have experienced us otherwise."

Percy Brandon, General Manager of the Vintners Inn, offered up the following feedback, "As a boutique 4-Diamond luxury inn with 44 rooms in the heart of California Wine Country, we try to ensure we attract the right guest demographic to match our property. One highly-challenging guest can have a very detrimental impact on the mood of the entire property. With Travelzoo, we were able to attract very much the right match. This was driven by the high-quality nature of the audience they have attracted and the fact that the Getaway promotion was not just a cheap room, it included an entire experience - room, wine, dinner and local experiences. The offer itself was naturally up-market and priced as such."

Maja Zieman, Director of Sales at the Pestana Hotel Berlin Tiergarten, explained, "Travelzoo Getaways exceeded our expectations by far, with more than 1,500 room nights booked."

34


Patrick Brunet, Yield Manager de l'Hotel Roussi'hotel in France shared, "The distribution was well-targeted, and the journalistic write-up positioned the values of our establishment in a creative and objective manner. The results are very impressive."

Luc Morel, General Manager of the Feathers Hotel in the Cotswolds, England, said, "We were impressed with the quality of the guests Travelzoo brought. More than half of Travelzoo guests upgraded to a higher rate suite, and they were happy to spend additional money on food and beverage once on property."

106. The highlighted statements were materially false and misleading because, inter

alia, Defendants failed to disclose that, because Travelzoo was now essentially competing with

itself, part of the revenues received through Getaways were, as described above, at the expense

of the Company's core travel business, and thus impaired Travelzoo' s revenue growth and/or

earnings growth. See ¶1J56-66 .

107. On June 8, 2011, Defendants published another press release relating to Local

Deals' success and specifically referred to Getaways:

Travelzoo Asia Pacific Launches Local Deals in Hong Kong

Travelzoo Asia Pacific, a licensee of Travelzoo Inc. (NASDAQ: TZOO), a global Internet media company, today announced the launch of Travelzoo Local DealsTM in Hong Kong. This follows the successful launch in Australia in April this year, which has already sold over 7,000 vouchers and generated close to AUD 1 million in gross revenue.

The service extends Travelzoo's offerings with more quality lifestyle and entertainment deals, drawing the brand closer to its subscribers. Travelzoo Hong Kong's first trial Local Deal was a complete sell out. Launched on 30 May 2011, the deal introduced an evening of fine dining at Hotel Nikko's Japanese restaurant 'Sagano' -- with its reputation for authentic Japanese cuisine. The trial resulted in 532 vouchers sold and generated over HKD 630,000 in gross revenue within two days. It had to be stopped to contain capacity.

Given the success, more Local Deals have been launched in Hong Kong, including Getaway packages with the Kantary

35


Beach Hotel Villas and Suites in Thailand and Hotel Royal in Macau.

"The launch of Local Deals in Hong Kong extends our business to the next stage of growth in Asia Pacific," said Jason Yap, CEO, Travelzoo Asia Pacific. "We are confident in leveraging on our present operational momentum to propel the business with Local Deals, as shown by the enormous successes in Travelzoo North America and Europe. With over 3 million quality subscribers in Asia Pacific who are familiar with transacting high-valued travel items, we are sure that Local Deals will be very well received."

"Travelzoo Hong Kong has strong competitive advantages in this already crowded market. In addition to our high quality and loyal subscribers, we are not under pressure to deliver just any deal. With an existing media business that is operating well, we have the privilege to be selective on deals that we publish to our subscribers, which allows us to continue doing what we do best," said Katherine Lau, Deputy General Manager, Travelzoo Hong Kong. "We are delighted but not surprised by the Sagano result. In Hong Kong, we presently have more than 360,000 active subscribers, who are swift in responding to a great deal."

"We were impressed at the speed our offer was taken up," said Ricky Lai, F&B Director, Hotel Nikko. "This promotion generated additional demands for the hotel's restaurant, which generally caters to business travellers on weekdays. Travelzoo Local Deals and its deal experts provided an innovative channel that packaged our weekend offer to its subscribers. As we fill up the restaurant with Traveizoos subscribers, we can see the quality of patrons. We are certain that they will be return diners."

Travelzoo Asia Pacific applies the same rigorous deal selection and approval process to Local Deals, for which it has become well-known. The process distinguishes Travelzoo as the most trusted publisher of travel and entertainment deals.

For more information about Travelzoo Local Deals, please visit www.travelzoo.com.hk .


a/ia, Defendants failed to disclose that, because Travelzoo was now essentially competing with


36


of the Company's core travel business, and would thus impair Travelzoo' s revenue growth

and/or earnings growth. See ¶'i[56-66 .

109. Between June 1, 2011 and June 15, 2011, Defendant Bartel sold approximately


110. On June 17, 2011, ThinkEquity analyst reiterated his $38 earnings per share

figure for Travelzoo.

111. On June 22, 2011, Forbes. com reported that Company shares rallied after

Benchmark Capital analyst, Frederick Moran, published a report touting Local Deals' success:

Travelzoo Rallies; Benchmark Says Local Deals Surge In June

Travelzoo shares are up sharply Wednesday following bullish comments on the company's Groupon-like Local Deals business by Benchmark Capital analyst Frederick Moran.

"Local Deals continue to ramp up with sales in June pacing meaningfully higher than May based on our channel checks," the analyst writes in a research note. Moran thinks the company's Local Deals unit can generate $110 million in gross revenue and $43 million in net revenue in 2011. He lifts his EPS forecast for the year to $1.72 from $1.64; for 2012, he goes to $2.78, from $2.65.

He thinks the company had gross revenue of $6.6 million in April, $9 million in May and as much as $11 million in June. He notes that the company now offers deals in about 100 markets.

Moran's price target on the stock is $124; the stock this morning is up $4.23, or 7.1 %, to $63.60. (Emphasis added).

THE TRUTH IS FINALLY DISCLOSED TO INVESTORS

112. On July 21, 2011, Defendants revealed to investors that the Company had lower

than expected revenues in the second quarter of 2011. Defendants reported second quarter

revenue of $37.6 million, well below analyst estimates as high as $41.4 million and consensus of

$40.2 million, as well as earnings per share of $30 per share, 21% below analyst consensus

expectations of $38 per share. The press release stated, in pertinent part:

37


Travelzoo Reports Second Quarter 2011 Results

NEW YORK, July 21, 2011 -- Travelzoo Inc. (NASDAQ: TZOO):

Revenue of $37.6 million, up 34% year-over-year

Operating profit of $7.6 million, up 29% year-over-year

Net income of $4.9 million, up 51% year-over-year

Earnings per share of $0.30, compared to $0.20 in the prior year period

Travelzoo Inc., a global Internet media company, today announced financial results for the second quarter ended June 30, 2011, with revenue of $37.6 million, an increase of 34% year-over-year. Operating profit was $7.6 million, up 29% year-over-year. Net income was $4.9 million, with diluted net income per share (EPS) of $0.30, up from $0.20 in the prior-year period....

113. As discussed below, Defendant Loughlin admitted during a conference call that

day that the lower revenue growth was caused, in part, by Getaways' cannibalization of revenue

from the Company's core travel business.

114. Defendants attempted to paint a happy face on the results by emphasizing the

increase in revenue year over year, but the market saw through it. Shares of the Company

immediately collapsed, falling approximately $30.00 per share, or 30 percent, to $60.00 per share

in morning trading on the Nasdaq, after touching a low of $57.48 per share.

115. The conference call Defendants held with analysts after the announcement of

Travelzoo' s second quarter financials is illuminating. In that call, Defendant Loughlin admitted

that Getaways' "cannibalization" of revenues from the Company's core travel business had

apparently impaired revenue growth in the core travel business.

116. Indeed, four of five analysts on the conference call, Frederick Moran, Eric

Martinuzzi, Atul Bagga, and Edward Woo, asked Defendant Loughlin about either

cannibalization, or the other side of the coin, weaker core travel revenues.


UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

IN RE TRAVELZOO INC. SECURITIES LITIGATION

Civil Action No.: 1 1-CV-5531 (GBD)

JURY TRIAL DEMANDED

CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT

1. Lead Plaintiffs Michele Minnick and Jan Frazer ("Lead Plaintiffs" or "Plaintiffs")

allege the following upon information and belief, except as to those allegations concerning Lead

Plaintiffs, which are alleged upon personal knowledge. Lead Plaintiffs' information and belief

are based upon, among other things, Lead Counsel's investigation, which includes without

limitation, review and analysis of filings with the United States Securities and Exchange

Commission ("SEC"), press releases, news articles, and analyst reports. Lead Plaintiffs believe

that substantial additional evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

2. This is a federal class action on behalf of purchasers of the securities of Travelzoo

Inc. ("Travelzoo" or the "Company") between March 16, 2011, and July 21, 2011, inclusive (the

"Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the

"Exchange Act"). As alleged herein, Defendants published a series of materially false and

misleading statements that Defendants knew and/or recklessly disregarded were materially false

and misleading at the time of such publication, and that omitted to reveal material information

necessary to make Defendants' statements, in light of such material omissions, not materially

false and misleading.

52043 vi



Ralph Bartel. Travelzoo informs over 23 million subscribers worldwide, as well as millions of

website users, about travel, entertainment and local deals available from thousands of companies.

4. Travelzoo has two branches: (i) its core travel business, which publishes email

newsletters that offer sharply discounted travel deals in return for up-front advertising fees paid

by hotels, airlines, or cruises; and (ii) its Local Deals business, which was launched in August

2010, through which Travelzoo subscribers can purchase vouchers for deals from local

businesses such as spas and restaurants through the Travelzoo website. A portion of the fee from

the voucher is paid to the merchant, usually 60-70%, and the remainder is paid to Travelzoo.

Local Deals grew quickly after the first quarter of its introduction, which was the third quarter of

2010. In fact, from the first to second quarter of its operations, Local Deals' gross revenues

increased approximately 1000%.

5. Travelzoo launched Local Deals Getaways ("Getaways"), a branch of Local Deals

relating to travel, in March 2011 - but, tellingly, Defendants did not disclose the launch of

Getaways until June 1, 2011. Getaways differed from the usual Local Deals offers which sold

vouchers for, e.g., spas, restaurants, or other entertainment. Getaways, in contrast, sold vouchers

for hotels and travel, catering to subscribers who wanted a getaway local to them. Getaways was

thus a hybrid between Local Deals and the Company's core travel business. Getaways typically

paired a hotel stay with a spa or restaurant deal, often in driving distance from the subscriber.



























9. Throughout the Class Period, Defendants were aware of such inevitable

cannibalization of growth and revenue by Getaways. Indeed, Defendant CEO Loughlin admitted