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Virtual Data Room Provider Must Face Some Disclosure Claims, Court Decides

Tuesday, May 14, 2013

The U.S. District Court for the Southern District of New York ruled May 8 that investors may proceed with class securities claims that virtual data room provider IntraLinks Holdings Inc.(IL) touted company strength and customer satisfaction without disclosing the impending loss of its largest customer, the Federal Deposit Insurance Corporation (Wallace v. IntraLinks Holdings Inc., S.D.N.Y., No. 11 cv 8861(TPG), 5/8/13).

However, other claims, including those related to alleged overbilling customers, are insufficient, the court said.

Secondary Offering

Judge Thomas Griesa explained that IntraLinks provides “cloud-based” virtual data rooms--VDRs--that are secure web-based workspaces in which customers can easily share large amounts of sensitive information with other specified parties.

In the past, the court noted, IntraLinks’ business was divided between customers using VDR services for mergers and acquisitions (M&A) and those using it for debt capital markets (DMC). The company’s main customers were financial services institutions and its business model was based on short term contracts for project or transaction specific subscriptions, usually for three to 12 months, the court said.

In a bid to expand, IntraLinks launched a new division called “Enterprise” which was to include entities that used IntraLinks as a repository, with longer subscriptions. The FDIC became its largest customer.

From 2000 to 2006, the FDIC's business provided IntraLinks with between $200,000 and $600,000 in revenues, the court said. From 2007 to 2010, however, IntraLinks' revenue from the FDIC shot up to $13 million annually. In mid-2010, the FDIC began looking for a less expensive alternative after efforts to renegotiate the contract failed.

In April 2011, the court wrote, IntraLinks held a secondary offering where 7.5 million shares were sold at $25.20 per share.

As the information on IntraLink’s loss of the FDIC as a customer became known, its stock price dropped. In this action, the plaintiffs alleged various claims under 1933 Securities Act and the 1934 Securities Exchange Act. The defendants include IntraLinks, officials during the relevant period, and underwriters for the secondary offering.

The court determined that the plaintiffs “state a claim under all of the causes of action based on the allegation that defendants made false and misleading statements without disclosing the impending loss of its largest customer,” the FDIC.

The court said that given the circumstances--mainly that the FDIC had told IntraLinks that it would seek an alternative VDR provider--alleged statements touting customer satisfaction, renewal rate and strong market demand were misleading for failure to disclose the FDIC’s departure.

Among other specifics, the court said that various allegations support IntraLink’s scienter. This includes one IntraLink official’s refusal to renegotiate the FDIC contract and FDIC’s response that it would seek alternative providers, the court wrote. The “core operations” doctrine--providing an inference that high level corporate officials know of key facts by virtue of their positions--also lends support to the scienter allegations, the court said.

However, the court declared, the plaintiffs’ claims that “defendants made further false and misleading statements related to overbilling customers and revenue classification are insufficient to support any of the alleged claims.” These later allegations, the court said, fail to state a 1934 Act chiefly on their failure to plead loss causation.

To see the opinion, go to

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