Smith Barney in Defeat of $2 Billion Class Action

August 26, 2005

Cleary Gottlieb persuaded a Manhattan federal court to dismiss all claims asserted against Smith Barney, lead underwriter of Genuity, Inc.’s IPO—an IPO the court described as “the largest in internet history.” The plaintiffs claimed that the prospectus failed to reveal that Genuity’s business plan, which contemplated spending up to $13 billion over five years, “required” that over $4 billion be raised in the IPO (which in fact netted only $2 billion). Genuity filed for bankruptcy about two years after the IPO. The plaintiffs attributed Genuity’s demise (which occurred following the bursting of the “internet bubble”) on the concealed “undercapitalization.”

The Court rejected every aspect of the class claim: there was no $4 billion capitalization “requirement” in the business plan; Genuity was not, in fact, undercapitalized; bespeaking caution, the prospectus couldn’t have been clearer that Genuity faced substantial capital needs; Smith Barney acted in good faith, and without scienter; and Genuity’s demise was not caused by anything said, or not said, in the prospectus. Indeed, the Court dismissed the complaint with prejudice—denying the plaintiffs leave to re-plead their claims.