case 3:09-cv-00791-k document 55 filed 02/11/2010 page 1 of...

Case 3:09-cv-00791-K Document 55 Filed 02/11/2010 of 93

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

JAN BUETTGEN, on Behalf of Himself and § Civil Action No. 3:09-cv-00791-KAll Others Similarly Situated, § (Consolidated with Nos. 3:09-cv-00938-K;

§ 3:09-cv-1049-K and 3:09-cv-1552-K)Plaintiff, §

§ CLASS ACTIONvs. §

KATHERINE J. HARLESS, et al., §§

Defendants. §§§

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THEFEDERAL SECURITIES LAWS AND JURY DEMAND

506038_1


TABLE OF CONTENTS

Page

INTRODUCTION 1

JURISDICTION AND VENUE 3

PARTIES 3

BACKGROUND TO THE CLASS PERIOD 6

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND MATERIALOMISSIONS IN THE CLASS PERIOD 12

INVESTORS BEGIN TO LEARN THE TRUTH 41

POST-CLASS PERIOD EVENTS AND ADMISSIONS 53

SCIENTER 55

IDEARC’S FALSE FINANCIAL REPORTING DURING THE CLASS PERIOD 66

NO SAFE HARBOR 80

FRAUD-ON-THE-MARKET PRESUMPTION 80

PROXIMATE LOSS CAUSATION/ECONOMIC LOSS 82

CLASS ALLEGATIONS 84

PRAYER FOR RELIEF 88

JURY TRIAL DEMANDED 89

- i -506038_1


INTRODUCTION

1. This is a securities fraud class action on behalf of all purchasers of Idearc, Inc.

(“Idearc” or the “Company”) securities between August 9, 2007 and October 30, 2008, inclusive (the

“Class Period”), against certain of Idearc’s officers and/or directors for violations of the Securities

Exchange Act of 1934 (the “Exchange Act”). On March 31, 2009, Idearc filed for bankruptcy and

is, therefore, not named as a defendant in this action

2. Idearc was formed in 2006 as a Delaware corporation in advance of a spin-off of

Verizon Communication, Inc.’s (“Verizon”) directory operations. The spin-off occurred on

November 17, 2006 through a tax-free distribution by Verizon of its shares of Idearc common stock

to Verizon’s shareholders, who received one share of Idearc common stock for every twenty shares

of Verizon common stock.

3. Through the spin-off from Verizon, Idearc inherited over $9 billion in debt and

entered into several agreements with Verizon designed to govern the relationship between the two

companies going forward. Chief among those agreements was the Tax Sharing Agreement that

provided for, among other things, Idearc’s responsibility for all tax consequences of the spin-off

should the tax-free status of the exchange be revoked. The Tax Sharing Agreement prohibited

certain actions by Idearc that might jeopardize the tax-free exchange, including restructuring debt,

issuing equity or taking measures to liquidate, merge, consolidate or dispose of all or part of Idearc’s

assets for a period of two years after the exchange.

4. Defendants knew, because Idearc would not be able to restructure the massive debt it

took on through the spin-off for at least two years, that the market would carefully watch Idearc’s

cash flow for signs that the Company was not able to manage its debt load. It was, thus, imperative

that defendants portray Idearc as having strong cash flows and no liquidity issues.

- 1 -506038_1


5. However, notwithstanding the realities of their situation, before the Class Period even

began, defendants made decisions that directly contradicted the goal of maximizing cash flows and

managing the Company’s massive debt. To begin, defendants dismantled the Company’s collection

department in an effort to balance the budget. Thus, beginning in early 2007, no organized,

concerted effort was being made within the Company to collect past due receivables. As a result, the

Company’s bad debt levels soared throughout the Class Period and Idearc’s cash flows materially

suffered.

6. Yet each quarter during the Class Period, defendants assured the market that Idearc’s

bad debt levels were in check, the Company had sufficient cash flows to meet its debt service

obligations and that Idearc absolutely had no liquidity issues. In truth, Idearc’s bad debt levels were

growing at such a significant pace that defendants began to manipulate the Company’s accounts

receivables by including millions of dollars of bad debt receivables that were uncollectible and

would need to be written off to mask that growth. When defendants did have to report growing bad

debt levels, they blamed the conversion from a Verizon-based billing system to an Idearc direct

billing system for a “near term” increase in the levels. At each hint of growing bad debt levels,

Idearc’s stock price plummeted, 36% in February 2008 and 40% in July 2008.

7. Defendants, however, were able to maintain their illusion of liquidity long enough to

avoid the perils of the Tax Sharing Agreement. On October 30, 2008, almost two years to the day

after the Verizon exchange, defendants announced that the Company’s bad debt had increased to

8.2% (up from under 5% in the first quarter of 2008) and that they had hired experts to help them

“review alternatives related to the Company’s capital structure.” Idearc stock again fell 36% on this

news. That same day, defendants also announced that on October 24, 2008 they had drawn down

$247 million of the Company’s $250 million revolving line of credit – even though the Company

reported $304 million of cash on its balance sheet. This draw down occurred on the same day that

- 2 -506038_1


defendants received notice from the New York Stock Exchange (“NYSE”) that Idearc’s stock was

not in compliance with the listing standards and would be delisted if the conditions were not

remedied. Idearc’s stock was eventually delisted by the NYSE on November 20, 2008.

JURISDICTION AND VENUE

8. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the

Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the

Securities and Exchange Commission (“SEC”) (17 C.F.R. §240.10b-5).

9. This Court has jurisdiction over the subject matter of this action pursuant to 28 U. S.C.

§1331 and §27 of the Exchange Act (15 U.S.C. §78aa).

10. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

§ 1391(b), as many of the acts and practices complained of herein occurred in substantial part in this

District.

11. 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

12. By Court Order dated November 9, 2009, Kentucky State District Council of

Carpenters Pension Trust Fund (the “Fund”) was appointed as Lead Plaintiff in this action. As set

forth in the Certification of the Fund, filed in connection with its motion to be appointed Lead

Plaintiff and attached hereto as Exhibit A, the Fund purchased Idearc securities during the Class

Period and, as a result of defendants’ conduct alleged herein, suffered damages in connection with

the purchase of Idearc securities.

13. Defendant Katherine J. Harless (“Harless”) served as President and Chief Executive

Officer (“CEO”) of Idearc from 2000 through February 16, 2008. She remained an employee of the

- 3 -506038_1


Company through February 22, 2008. During the Class Period, Harless signed Idearc’s SEC Forms

10-Q and 10-K, as well as the accompanying Sarbanes-Oxley certifications. According to Idearc’s

SEC Form 10-K for the year ending December 31, 2006, Harless also served as a director of the

Company since November 2006.

14. Defendant Andrew Coticchio (“Coticchio”) served as Executive Vice President, Chief

Financial Officer (“CFO”), and Treasurer of Idearc from 2003 through November 26, 2007. He

remained an employee of the Company through December 31, 2007. During the Class Period,

Coticchio signed Idearc’s SEC Forms 10-Q and 10-K, as well as the accompanying Sarbanes-Oxley

certifications. Coticchio served as CFO since March 2003, Treasurer since October 2006 and

Executive Vice President since November 2006.

15. Defendant Samuel D. Jones (“Jones”) has served as Executive Vice President, CFO,

and Treasurer of Idearc from September 1, 2008 through the present. Jones also served as acting

CFO and Treasurer of Idearc from November 26, 2007 through August 30, 2008. Jones has also

served as Senior Vice President of Investor Relations since November 2006, and as Executive

Director-Financial Planning and Analysis from June 2002 to October 2006. During the Class Period,

Jones signed Idearc’s SEC Forms 10-Q and 10-K, as well as the accompanying Sarbanes-Oxley

certifications.

16. Defendant Frank P. Gatto (“Gatto”) served as acting CEO of Idearc from

February 26, 2008 through May 30, 2008. He also served as Idearc’s Executive Vice President-

Operations from January 2008 through February 2008. Gatto served as President of Idearc’s

Northeast region from June 2005 to January 2008 and served as Senior Vice President-Operations

from September 2001 to June 2005. During the Class Period, Gatto signed Idearc’s SEC Forms 10-

Q and 10-K, as well as the accompanying Sarbanes-Oxley certifications.

- 4 -506038_1


17. Defendant Scott W. Klein (“Klein”) has served as CEO of Idearc and a member of the

Board of Directors from May 30, 2008, through the present. During the Class Period, Klein signed

Idearc’s SEC Forms 10-Q and 10-K, as well as the accompanying Sarbanes-Oxley certifications.

18. Defendants Harless, Coticchio, Jones, Gatto and Klein (collectively, “defendants”),

by virtue of their high-level positions with the Company, had access to adverse, undisclosed

information about the Company’s business, operations, operational trends, financial statements,

markets, present and future business prospects, and credit and collections policies via internal

corporate documents, conversations and connections with other corporate officers and employees,

attendance at management and board meetings and committees thereof, and via reports and other

information provided to them in connection therewith.

19. By virtue of their high-level positions with the Company, defendants possessed the

power and authority to control the contents of Idearc’s quarterly reports and other public filings,

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

institutional investors, i. e., the market. Each of the defendants, by virtue of their high-level positions

with Idearc, directly participated in the management of the Company and was directly involved in

the day-to-day operations of the Company. Defendants were involved in drafting, producing,

reviewing and/or disseminating the false and misleading statements and information alleged herein,

and were aware, or recklessly disregarded, that false and misleading statements regarding Idearc

were being issued, and approved or ratified these statements, in violation of the federal securities

laws.

20. As officers and controlling persons of a publicly-held company whose common stock

was traded on the NYSE during the Class Period, and governed by the federal securities laws,

defendants each had a duty to disseminate promptly accurate and truthful information regarding the

Company’s credit and collections policies, financial condition and performance, growth, operations,

- 5 -506038_1


financial statements (including bad debt expense), business, markets, management, earnings, and

present and future business prospects, and to correct any previously-issued statements that had

become materially misleading or untrue, so that the market price of Idearc’s publicly-traded common

stock would be based upon truthful and accurate information. Defendants’ misrepresentations and

omissions during the Class Period violated these specific requirements and obligations.

21. Each of the defendants is liable as a participant in a fraudulent scheme and course of

conduct that operated as a fraud or deceit upon purchasers or acquirers of Idearc common stock by

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

The scheme: (i) deceived the investing public regarding Idearc’s business; (ii) artificially inflated the

price of Idearc’s securities; and (iii) caused plaintiff and other members of the Class to purchase

Idearc securities at inflated prices.

Relevant Non-Parties

22. Non-party Idearc is a media company that manages and delivers print, online and

wireless publishing and advertising services on multiple platforms. The Company’s services include

yellow pages, white pages, online directory and search services, website design and hosting services,

magazines, direct mail, and directory and information services for wireless subscribers. Idearc is one

of the largest publishers of Spanish-language directories. Idearc is the official publisher of Verizon

print directories and is the provider of SuperPages.com . Idearc’s fiscal year (“FY”) follows the

calendar year.

BACKGROUND TO THE CLASS PERIOD

23. Idearc was formed as a subsidiary of Verizon in 2006. Later that year, Verizon

transferred to Idearc all of Verizon’s ownership interest in Verizon Information Services, Inc. and

other assets, liabilities, businesses and employees primarily related to Verizon’s domestic print and

- 6 -506038_1


internet yellow pages directories publishing operations. As a result of the spin-off, Idearc became an

independent public company.

24. As part of the spin-off from Verizon, Idearc incurred $9.115 billion of debt, made up

of $2.85 billion in senior unsecured notes and $6.265 billion in a Senior Credit Facility, secured by

virtually all of Idearc’s assets and guaranteed on a secured basis by substantially all of Idearc’s

subsidiaries. This Senior Credit Facility consists of: (1) a $1.515 billion Tranche A Loan Facility,

(2) a $4.655 billion Tranche B Loan Facility, and (3) a $250 million Revolving Credit Facility.

25. In exchange for the assets transferred to it from Verizon, Idearc issued to Verizon

additional shares of Idearc common stock to be distributed to Verizon’s stockholders pro rata in the

spin-off, issued to Verizon senior unsecured notes and a portion of the loan proceeds under the

Tranche B Facility, and transferred to Verizon approximately $2.4 billion in cash generated from the

proceeds of the loans under the Tranche A Facility and proceeds from the remaining portion of the

loans under the Tranche B Facility. Idearc was left with $100 million in cash on its books from this

transaction.

26. A number of agreements were executed between Idearc and Verizon as part of the

spin-off. One of these agreements, the Tax Sharing Agreement, imposed certain restrictions on

defendants’ ability to restructure the $9 billion of debt Idearc was taking as part of the spin-off, issue

equity, liquidate, merge or consolidate, or dispose of all or any portion of Idearc’s assets for a period

of two years from the spin-off so as not to jeopardize the tax-free status of the spin-off transaction.

A copy of the Tax Sharing Agreement filed by Idearc and Verizon as part of the spin-off is attached

as Exhibit B and incorporated herein by reference. The Tax Sharing Agreement also provided that

Idearc was responsible for:

[A]ll Taxes . . . (ii) resulting from the Preliminary Restructuring, the Distribution, theDebt Exchange or any transaction associated therewith as described in the Ruling orthe Distribution Agreement, to the extent that such Taxes arise as a result of any

- 7 -506038_1


action taken by Spinco [Idearc] or any member of the Spinco Group following theDistribution (other than, in the case of the Tranche B Term Loan, the repaymentthereof prior to the stated maturity in accordance with Section 2.10(b) of the CreditAgreement), or (iii) resulting from any breach of or inaccuracy in any representation,covenant or obligation of any member of the Spinco Group under this Agreement(collectively, “Spinco Taxes”).

Exhibit B. This potential tax liability was substantial and defendants were keenly aware that if

Idearc failed within the first two years, potential, tremendous tax debt awaited.

27. On February 8, 2007, defendants hosted their first earnings conference call as an

independent publicly traded company to discuss Idearc’s FY06 financial results. Harless and

Coticchio participated in the call. Harless, President and CEO, assured investors Idearc was “off to a

strong start” and was on track to meet its revenue forecast for 2007. Harless further informed the

market that Idearc’s “[s]ales, productivity and results continue and I would emphasize continue to

improve. ” 1 The Company was doing so well, Coticchio stated, that it paid its first dividend as part of

its approximately $200 million a year dividend program.

28. During the same February 8, 2007 conference call, Coticchio, Executive Vice

President and CFO, stated: “Our recurring revenue streams and strong cash flow give us the ability

to pay this dividend while at the same time investing in our business and servicing our debt.”

29. Coticchio also discussed the migration of Idearc’s customers to a direct billing system

during the February 8, 2007 conference call, noting the Company would complete the transition by

the end of 2007:

We are moving forward with our plan. We will finish it by the end of 2007.We probably have of the telco billed customers right now about 60%, 65% of themcut over to the new platform. It is going very well on getting them converted. We’respending a lot of time talking to customers. They are understanding the shift.There is no blips in the rollout schedule so we are very pleased with how it is goingso far and we anticipate finishing on time before the end of the year.

1 Here, as elsewhere, emphasis has been added and citations omitted, unless otherwise noted.

- 8 -506038_1


30. In its SEC Form 10-K for the year ending December 31, 2006, which was filed

March 8, 2007, Idearc provided a description of its business:

Our multi-platform portfolio strongly positions us in our market space. Weare the second largest yellow pages directories publisher in the United States asmeasured by revenues, and we believe that we have the nation’s leading Internetyellow pages directory. Our products include print yellow pages, print white pages,an Internet yellow pages directory, Superpages.com®, and an information directoryfor wireless subscribers, Superpages Mobile SM. We are the exclusive officialpublisher of Verizon Communications Inc. print directories in the markets in whichVerizon is currently the incumbent local exchange carrier, which we refer to as ourincumbent markets. We use the Verizon brand on our print directories in ourincumbent markets, as well as in our current markets in which Verizon is not theincumbent, which we refer to as our independent markets.

* * *

We derive our revenues primarily through the sale of print directoryadvertising. Approximately 93% of our revenues for 2006 came from the sale ofadvertising in print directories. The remaining 7% came from our Internet business,which includes Superpages.com . In 2006, we generated revenues of $3,221 millionand operating income of $1,323 million.

* * *

We completed our spin-off from Verizon on November 17, 2006. Inconnection with the spin-off, we issued approximately 146 million shares of ourcommon stock and $9,115 million in debt. In addition, we entered into variousagreements with Verizon, including a 30-year publishing agreement pursuant towhich we are the official publisher of Verizon print directories with rights to publishyellow pages under the Verizon brand in both our incumbent and current independentmarkets.

* * *

Favorable cash flow characteristics. Our business benefits from strongrevenue visibility, low capital requirements and significant cash flow generation.The pre-sold nature of directory advertising provides significant revenue and cashflow visibility because advertisers generally pay on a monthly basis over the life of aprint directory, which is typically one year, and over the term of Internet advertising,which is also typically one year. The capital expenditure requirements of ourbusiness are modest and amounted to $64 million, $78 million and $85 million in2006, 2005 and 2004, respectively, in each case representing less than 2.5% of totaloperating revenue. As a result, we generate strong free cash flow.

* * *

- 9 -506038_1


In 1996, we launched Superpages.com. We view Superpages.com as a naturalextension of, and a complement to, our print directories. We believe thatSuperpages.com, which includes approximately 18 million business listings and tensof millions of residential listings in the United States, is the nation’s leading Internetyellow pages directory. It was the first Internet yellow pages directory to offer bothfixed-fee and performance-based advertising product options. Superpages.com hadmore than 2 billion network searches in 2005, and continued to show strong growthin 2006 with more than 2.8 billion network searches.

31. Idearc’s FY06 Form 10-K also assured investors it was capable of withstanding

downturns in the economy:

[O]ur customers often do not reduce or eliminate directory spending duringdifficult economic periods because failure to advertise cannot be remedied until thereplacement directory is published, typically about a year later.

32. Also in its FY06 Form 10-K, Idearc touted its decline in bad debt resulting from its

tightening of the process for extending credit to customers:

Billing and Credit Control

Currently, we direct bill more than 80% of our customers. By the end of2007, we anticipate migrating our remaining customers to our direct billing systems.We have a billing and collection agreement with Verizon. Under the agreement,Verizon bills and collects from our customers who have not yet migrated to ourbilling systems. These remaining customers, who are also Verizon local telephonecustomers, consist primarily of smaller customers serviced by our telephone callcenter.

In 2003, in order to reduce our bad debt expense, we implemented a newcredit and collections program, which resulted in more stringent policies, processreengineering and system improvements. By the end of 2004, some aspects of theprogram were implemented. These initial efforts helped reduce our bad debt expenseas a percent of total operating revenue from 8.1 % in 2003 to 6.6% in 2004. During2005, we continued to implement additional new processes, which further reducedour bad debt expense as a percent of total operating revenue to 4.9% in 2005. In2006, these enhancements were fully implemented and our bad debt expense as apercent of total operating revenue was 4.3%.

* * *

We manage collection of accounts receivable by conducting initial credit checks ofnew customers (under certain circumstances) and, where appropriate, requiringpersonal guarantees from business owners. We check all new orders from existingcustomers for payments that are past due to us prior to publishing the new order.When applicable, based on our credit policy, we use both internal and external data

- 10 -506038_1


to decide whether to sell to a prospective customer. In some cases, whereappropriate, we may also require the customer to prepay part or all of the amount ofits order. Beyond efforts under certain circumstances to assess credit risk, we employwell-developed collection strategies using an integrated system of internal, externaland automated means to engage with customers concerning payment obligations.

33. Despite these positive statements and assurances about Idearc’s business and

operations, Harless, Coticchio, Jones and Gatto knew by at least February 2007, as described in

¶¶131-132, that Idearc’s bad debt levels were rising and that no concerted efforts were being made

within Idearc to collect overdue receivables. Defendants knew that restructuring the staggering debt

levels was not an option for at least two years from the spin-off because of the specific prohibition in

the Tax-Sharing Agreement with Verizon. They also new that if Idearc declared bankruptcy within

two years of the spin-off, the tax-free status of the spin-off would be in jeopardy and if the Internal

Revenue Service (“IRS”) determined that the transaction no longer qualified for tax free treatment,

Idearc would be liable for all the tax consequences associated with the spin-off, as well as potential

liability for representing that Idearc’s business was robust enough to meet the $9 billion debt

obligations Idearc inherited through the spin-off. Therefore beginning in at least April 2007,

defendants began to manipulate Idearc’s accounts receivable and bad debt levels, as described in

¶148, to mask Idearc’s growing bad debt levels.

34. Defendants also knew by at least February 2007, that the staggering debt levels put

the quarterly divided payments Idearc touted to its investors at risk and that any perception of a

liquidity problem would trigger a massive investor exodus, driving down Idearc’s stock price and

potentially triggering a default of Idearc’s debt covenants resulting in the call for immediate

repayment of the massive debt Idearc was holding. Defendants knew they needed to provide an

illusion of liquidity and strong cash flow to stave off bankruptcy for at least two years to avoid the

revocation of the tax free status of the spin-off, and avoid the potential massive tax liability violation

of the Tax Sharing Agreement, promised.

- 11 -506038_1


35. On May 3, 2007, defendants reported Idearc’s 1Q07 financial results and hosted a

conference call with analysts and investors to discuss these results and Idearc’s operations.

Defendants again reiterated their theme of liquidity and manageable debt levels. Importantly,

Harless emphasized: “we are reporting a healthy cash flow that will fund another dividend to

stockholders.” Harless also stated Idearc was “seeing strong customer loyalty” and was also

attracting new customers with its expansion of internet based advertising – which was “growing at a

rapid pace.”

36. During the May 3, 2007 conference call, Coticchio further touted the Company’s

strong financial results for first quarter 2007 in part due to the Company’s reduction of bad debt:

Let me put a little more color on this. When you look at sequential-quarterbasis, comparing first quarter 2007 adjusted pro forma OIBITDA to the fourthquarter of 2006, we reported a significant increase of 18 million, or 5%, because ofimproved revenue, reduced bad debt, and the timing impact of selling expense. . . .Our healthy cash flow again will fund a dividend to stockholders.

37. Defendants’ message was resonating with investors and they were responding to it.

Idearc stock traded as high as $37.91 in the two trading days following defendants’ May 3, 2007

1 Q07 report – an increase of as much as 5% from the closing price on May 2, 2007 – with almost 2

million shares trading during that timeframe.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ANDMATERIAL OMISSIONS IN THE CLASS PERIOD

38. On August 9, 2007, the first day of the Class Period, Idearc issued a press release

announcing its 2Q07 financial results. Under the headline, “Idearc Announces Second-Quarter

Multi-Product Revenue and OIBITDA Growth; Superpages.com Generates 33 Percent Revenue

Growth,” defendants reported that the Company experienced:

• Superpages.com revenue grew 33 percent;

• Adjusted pro forma OIBITDA grew 3.4 percent; and

• Healthy cash flow funds another quarterly dividend to stockholders.

- 12 -506038_1


The press release attributed the strong growth in Superpages.com to “solid growth” in “all” sales

channels, “Superpages.com ’s performance was driven by solid growth from all sales channels,

increased traffic and contributions from both fixed-fee and pay-for-performance product offerings.”

Defendants also attributed the growth in OIBTDA “to increased revenue and reduced overhead

expenses, partially offset by Internet-related expenses associated with Superpages.com growth as

well as additional selling expense.”

39. Defendants used their press release to also assure investors that the Company’s cash

flows were strong and would be sufficient to fund Idearc’s quarterly dividend payment:

Free cash flow for the six months ended June 30, 2007, was $116 millionbased on cash from operating activities of $138 million less capital expenditures of$22 million. Free cash flow included the cash impact of $34 million associated withone-time transition costs. Strong cash flow – driven by improved financialperformance for the quarter – will fund another quarterly dividend of 34.25 cents peroutstanding share.

40. Later that day, defendants hosted a conference call with analysts and investors to

discuss Idearc’s strong 2Q07 earnings and operations. A point of emphasis during the call made by

both Harless and Coticchio was Idearc’s “strong cash flow will fund another quarterly dividend to

stockholders.”

41. During the August 9, 2007 conference call, Credit Suisse analyst Jake Newman asked

about Idearc’s bad debt expense. Coticchio responded:

We’re running in the low 4% range for the first half of the year, which is right in linewith how we finished up the full year last year. So, looking at the six monthscompared to the prior -year 12 months, it’s running about the same low 4% range.

42. On August 10, 2007, the day after Idearc’s 2Q07 earnings conference call, defendants

caused the Company to file its SEC Form 10-Q for the quarter ending June 30, 2007. The 2Q07

Form 10-Q told investors the following regarding the Company’s continued decrease in bad debt

expense:

- 13 -506038_1


General and administrative expense of $93 million for the three months ended June30, 2007 decreased $6 million, or 6.1%, compared to $99 million for the threemonths ended June 30, 2006. The decrease is primarily related to a decrease ingeneral and administrative charges billed to us from our former parent during 2006,reduced employee benefit costs and reduced bad debt expense, partially offset bycosts associated with stock-based compensation expense and non-recurringseparation costs related to the spin-off. Bad debt expense of $32 million for the threemonths ended June 30, 2007 decreased by $4 million, or 11.1%, compared to $36million for the three months ended June 30, 2006. Bad debt expense as a percent oftotal operating revenue was 4.0% for the second quarter of 2007 compared to 4.5%for the second quarter of 2006.

* * *

General and administrative expense of $190 million for the six months ended June30, 2007 decreased $8 million, or 4.0%, compared to $198 million for the six monthsended June 30, 2006. The decrease is primarily related to a decrease in general andadministrative charges billed to us from our former parent during 2006, reducedemployee related costs, lower employee benefit costs and reduced bad debt expense,partially offset by costs associated with stock-based compensation expense and non-recurring separation costs related to the spin-off. Bad debt expense of $64 millionfor the six months ended June 30, 2007 decreased by $8 million, or 11.1 %, comparedto $72 million for the six months ended June 30, 2006. Bad debt expense as apercent of total operating revenue was 4.0% for the six months ended June 30, 2007compared to 4.5% for the six months ended June 30, 2006.

* * *

Accounts receivable is recorded net of an allowance for doubtful accounts.The allowance for doubtful accounts is calculated using a percentage of sales methodbased upon collection history and an estimate of uncollectible accounts.Management may exercise its judgment in adjusting the provision as a consequenceof known items, including current economic factors and credit trends. Accountsreceivable adjustments are recorded against the allowance for doubtful accounts.Bad debt expense as a percentage of revenue was 4.0% and 4.5% for the six monthsended June 30, 2007 and 2006, respectively.

43. Idearc’s 2Q07 Form 10-Q was signed by Harless and Coticchio. Furthermore,

Harless and Coticchio also signed the Sarbanes-Oxley certifications attesting that they reviewed the

contents of the filing to confirm the “this report does not contain any untrue statement of a material

fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect to the period

covered by this report.” These certifications further confirmed Harless and Coticchio “[d]esigned

- 14 -506038_1


such disclosure controls and procedures, or caused such disclosure controls and procedures to be

designed under our supervision, to ensure that material information relating to the registrant,

including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared.”

44. The positive statements, assurances and forecasts, outlined in ¶¶38-43, made by

defendants were materially false and misleading when made and failed to disclose material

information concerning Idearc’s business and business practices. Defendants knew or recklessly

disregarded, but failed to disclose, the following:

(a) As more fully described in ¶¶131-132, 139-141, defendants knew that Idearc’s

bad debt levels were rising and would continue to rise, in part as a result of the deliberate elimination

of Idearc’s collection department. Defendants knew that no concerted efforts were being made

within Idearc to collect past due receivables;

(b) Defendants were reducing Idearc’s bad debt levels by millions of dollars by

transferring delinquent and uncollectible receivables – that should have been written off – to current

accounts receivable, as described in ¶148. Thus defendants knew that the bad debt levels they

reported to the market were grossly understated;

(c) As described in ¶¶136-137, 142-143, defendants also knew that the transition

from the Verizon-based billing platform to Idearc’s direct billing system was being poorly handled

and resulted in customer confusion, account cancelation and disputed billings. However, it was

because of the poor handling of this transition and the lack of effort in collecting the amounts due,

not because of routine delay caused by the billing cycle, that contributed to Idearc’s increasing bad

debt levels;

(d) Further contributing to the increasing bad debt levels were defendants’

extreme relaxation of Idearc’s credit policies, as described in ¶¶132-134, 144-145; and

- 15 -506038_1


(e) As described in ¶¶155-186, Idearc’s financial statements were false and

misleading due to improper revenue recognition and a pervasive lack of internal accounting controls.

45. Defendants’ statements in August 2007 caused Idearc’s stock to continue to trade at

artificially inflated prices.

46. On November 1, 2007, defendants issued a press release announcing Idearc’s 3Q07

financial results. Under the headline, “Idearc Announces Third-Quarter Earnings Reiterates Full-

Year Guidance and Delivers another Quarterly Dividend,” defendants reported:

• Strong OIBITDA and net income results;

• Double-digit Internet revenue growth for quarter and year-to-date; and

• Healthy cash flow funds another quarterly dividend to stockholders.

The press release quoted Harless as stating:

“We are ahead of other directory publishers when it comes to transformingthe print business to a multi-product business. The steps we have taken throughoutthe year, along with our Internet growth, effectively position us for the future” . . . .“We are forging ahead with our multi-platform strategy and meeting industrychallenges head-on. . . .”

“We . . . worked aggressively throughout the third quarter to grow the Internetbusiness and to implement unique and strategic programs that are beginning tocapture new and non-traditional advertisers across all channels.”

The release also quoted Coticchio as stating:

“We experienced strong OIBITDA and net income results, along withdouble-digit Internet revenue growth both on a quarterly and year-to-date basis...Wewere also prudent in managing our expenses, which contributed to OIBITDA and netincome performance.”

Defendants again proclaimed that the Company’s strong cash flows supported another dividend

payment to investors.

47. In this press release, defendants reported the following financial highlights for the

third quarter and nine months ended Sept. 30, 2007:

- 16 -506038_1


Revenue Performance Consistent with Guidance

On an adjusted pro forma basis, third-quarter multi-product revenues were$791 million; a -1.7 percent difference compared to the same period in 2006.Internet revenue was $69 million in the third quarter of 2007, a 15.0 percent increasecompared to the same period in 2006. On an adjusted pro forma basis, year-to-datemulti-product revenues were $2,402 million, a -0.5 percent difference compared tothe same period in 2006. Year-to-date Internet revenue was $210 million, a 25.7percent increase compared to 2006.

Strong OIBITDA and Net Income Results

Idearc had OIBITDA of $380 million for the third quarter of 2007. On anadjusted pro forma basis, excluding non-recurring costs, OIBITDA for the thirdquarter was $398 million, or a -1.7 percent difference, compared to the same periodin 2006. Adjusted pro forma OIBITDA margins, excluding non-recurring costs,were 50.3 percent in the third quarter of 2007, compared to 50.3 percent in the sameperiod in 2006.

On a year-to-date basis, OIBITDA was $1,098 million. On an adjusted proforma basis, year-to-date OIBITDA was $1,168 million, or a -1.4 percent differencecompared to the same period in 2006. The change in year-to-date adjusted pro formaOIBITDA was driven by increased selling expenses, offset by lower overhead costs.

* * *

The company reported net income of $117 million, or 80 cents per dilutedshare, for the third quarter 2007. Adjusting for non-recurring costs, as described indetail in the accompanying financial schedules, Idearc’s adjusted pro forma netincome for the third quarter was $128 million, or 88 cents per diluted share.

Year-to-date reported net income was $329 million or $2.25 per diluted share.On an adjusted pro forma basis, year-to-date net income was $374 million, or $2.56per diluted share, a difference of $-1 million, or -1 cent per diluted share, over thesame period in 2006.

48. That same day defendants hosted a conference call with analysts and investors to

discuss Idearc’s results and operations. Harless, Coticchio and Jones participated in the call and had

the opportunity to address analysts’ and investors’ concerns. During the call, Harless stated:

First, healthy cash flow will fund another dividend to our stockholders.Second, we’re reiterating full -year guidance . . . . Third, we are forging ahead withour multiplatform strategy and beginning to capture new and nontraditionaladvertisers across all channels. Our local sales force, which is a key asset, is trainedand embracing the multiproduct sale.

Coticchio also touted Idearc’s strong cash flow:- 17 -

506038_1


[CJontinued strong cash flow enabled us to declare a dividend to be paid in thefourth quarter. . . . Free cash flow for the nine months ended September 30, 2007was $303 million based on cash from operating activities of $334 million, less capitalexpenditures of $31 million. Our strong cash flow again allowed us to declare aquarterly dividend.

49. During the November 1, 2007 conference call, Coticchio partially credited Idearc’s

strong 3Q07 financial results to growth in the internet (versus print) side of advertising:

[W]e once again delivered double-digit Internet revenue growth both on a quarterlyand year-to-date basis. . . . Year-to-date Internet revenue was $210 million, a 25.7%increase compared to the same periods in 2006.

50. During the November 1, 2007 conference call, Lehman Brothers analyst Anthony

DiClemente questioned defendants about how Idearc was dealing with the advertising industry’s

shift from print to electronic mediums:

Just to take a bit of a step back more broadly, I think the concern frominvestors is that you are seeing a transformation of the business to electronic fromprint faster than expected. And that given your positioning in electronic, I think thatis not necessarily a bad thing heading into ‘08. But I think if margins on a blendedbasis are definitely going to see further compression in ‘08, it brings to bear thequestion of whether EBITDA dollars can grow in ‘08. And I think that is probablythe key concern from an investor standpoint.

I guess our view here at Lehman has always been that Idearc couldpotentially grow those EBITDA dollars in ‘08 despite the margin compression. Butmy question is, and I apologize for being long-winded, my question is, does thetransformation to electronic happening faster than expected, does that precludeyou from actually growing EBITDA dollars in ‘08? How do you suggest that us asanalysts and investors think about that going into next year? Thank you.

In response, Harless assured investors Idearc was not facing financial problems as a result of this

industry-wide shift:

Let me just first start to say – talk a little bit about the transformation of thebusiness. I would tell you that it is not faster than we expected. We feel verycomfortable with where we are in our platforms and our multiproduct where wehave trained our salespeople, and we’re working through the balance of that andbeing able to roll out all of our multi-products whether or not it be the videoproducts, whether or not it be the mobile that we’re able to manage through thistransformation, and we feel very comfortable where we are in that stage.

- 18 -506038_1


Additionally, Coticchio confirmed Idearc’s margins were not in jeopardy as a result of the industry-

wide shift, and rather, the Company was well positioned to take financial advantage of it:

But clearly as you move print to Internet, you deal with some margin differential. Aswe look at where we seek our print trends growing, where we see our Internetgrowth, we think the contraction you are going to see is going to be in the marginpercent. We think we can manage through the margin dollars pretty effectively andgrow the business. We are not troubled by the rate of transformation. We think wehave got a great product set on the Internet side to lead that charge, and we thinkgiven where we see 2008 shaping up, we will be able to manage through that in aneffective manner.

51. During the November 1, 2007 conference call, Perennial analyst Chris Heintz brought

up the market’s interest in Idearc’s bad debt level, stating, “[i]t looks like your reserve for bad debt

as a percentage of sales has come down this year.” In response, Coticchio reiterated to investors a

false and misleading message regarding Idearc’s bad debt:

Our reserve bad debt this year we’re running in the mid 4 range. It is verysimilar to what we saw last year year-to-date. It is just a little over 4.5%.

52. Natixis Securities analyst Jeff Shelton sought additional answers from defendants

regarding the Company’s bad debt during the November 1, 2007 conference call:

The bad debt expense, it seemed to have shot up to about 6% of sales in the thirdquarter versus 4% in the first two. Is there anything specific to the quarter thatwould have resulted in the higher percentage?

In response, Coticchio stated:

Yes, Jeff, what we did is that was a onetime adjustment. As we looked atsome of the activity around the branding switch, the coming off the telco buildingplatform, working through all those issues and dealing with some level of customerconfusion, I felt the need to make a onetime adjustment in the quarter to bringthings in line for the full year. So that was not an indication of a falling off a cliff.It was more dealing with some stuff that I think is unique to this year because of thespend and some of the other activity around our systems.

53. On November 5, 2007, Idearc filed its SEC Form 10-Q for the quarter ending

September 30, 2007. The 3Q07 Form 10-Q:

Our primary source of funds continues to be cash generated from operations.Net cash provided by operating activities of $334 million for the nine months ended

- 19 -506038_1


September 30, 2007 decreased $460 million, compared to $794 million for the ninemonths ended September 30, 2006, primarily due to interest payments on debtincurred and separation costs associated with our spin-off from our former parent andan anticipated one-time increase in accounts receivable resulting from ourdecision to shift billing from Verizon to our own direct billing platform. In thepast, amounts billed and collected by Verizon were received well in advance ofnormal customer payment experience. Now that we are direct billing all customers,the new higher account receivable balance represents actual customer collectionexperience. These unfavorable items are partially offset by lower income taxpayments and other working capital items.

54. Idearc’s 3Q07 Form 10-Q was signed by Harless and Coticchio. Furthermore,

Harless and Coticchio also signed the Sarbanes-Oxley certifications attesting that they reviewed the

contents of the filing to confirm the “this report does not contain any untrue statement of a material

fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading with respect to the period

covered by this report.” These certifications further confirmed Harless and Coticchio “[d]esigned

such disclosure controls and procedures, or caused such disclosure controls and procedures to be

designed under our supervision, to ensure that material information relating to the registrant,

including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared.”





(a) As more fully described in ¶¶131-132, 139-141, defendants knew that Idearc’s

bad debt levels were rising and would continue to rise, in part as a result of the deliberate elimination

of Idearc’s collection department. Defendants knew that no concerted efforts were being made

within Idearc to collect past due receivables;

- 20 -506038_1











debt levels;

(d) Further contributing to the increasing bad debt levels were defendants extreme

relaxation of Idearc’s credit policies, as described in ¶¶132-134, 144-145; and



56. Defendants’ statements in November 2007 caused Idearc’s stock to continue to trade

at artificially inflated prices.

57. On November 28, 2007, M2 Communications Ltd. reported through its M2 Presswire

that Idearc named Jones as Acting CFO and Treasurer. M2 Communications reported:

Idearc Inc. announced that it has named Samuel D. (Dee) Jones as actingchief financial officer and treasurer, effective immediately, replacing Andy Coticchiowho is leaving his position as executive vice president, chief financial officer andtreasurer.

President and CEO Kathy Harless said, “Dee’s broad-based experience andknowledge of the industry will ensure a seamless transition as we conduct a searchfor a permanent chief financial officer.”

Jones also will continue his role as Senior Vice President – InvestorRelations. He is the primary liaison with the investment community and isresponsible for developing and executing the investor relations program, providing

- 21 -506038_1


strategic communications with shareholders, both institutional and individual, andleading the mergers and acquisitions team in financially beneficial transactions.

58. On February 7, 2008, Business Wire, Inc. published an article entitled “Idearc

Announces 2007 Results.” Business Wire reported:

Kathy Harless, the Company’s president and CEO, said, “Our 2007performance was in line with our expectations. As we begin the new year, weremain steadfast in the long-term view of the business and in our ability tomaximize stockholder value through our multi-product strategy.”

* * *

Strong and stable cash flows underlie the Company’s ability to maintain its dividendto stockholders.

* * *

“Expectations for 2008 fully support our balanced capital allocation program,which includes servicing debt, maintaining our strong dividend program andcontinuing to invest in growth opportunities for the business.”

59. On February 7, 2008, defendants hosted a conference call with analysts and investors

to discuss Idearc’s 4Q07 and FY 2007 earnings. Harless and Jones participated in the call and had

the opportunity to address analysts’ and investors’ questions and concerns about the Company’s

financial results and operations. During the call, Harless reiterated the themes defendants had been

conveying to the market since the before the Class Period – strong results were resulting in increased

value to shareholders, including another dividend payment. Harless opened the call by stating:

2007 was our first full year as an independent Company. It was a year oftransformation and investment. I want to highlight 3 key metrics that indicate thevalue that we are building as stockholders. We achieved Internet revenue growth ofapproximately 24%. We maintained strong OIBITDA margins, and we increased netincome and earnings per share on an adjusted pro forma basis.

Our many accomplishments throughout the year demonstrate that we aremaking progress on all fronts and gaining momentum. There are many initiativesand accomplishments behind our 2007 results, but our employees were the truedriving force behind those results. Our progress has been the result of a strongManagement Team, coupled with a dedicated and passionate workforce, who iscommitted to the Company’s success. . . .

- 22 -506038_1


Now, let’s start with our print business. As you know, this business accountsfor the majority of our revenues, and it is a strong free cash flow business.

60. One of the first items Jones addressed as part of his prepared remarks during the

February 7, 2008 conference call were the dividend payment to Idearc shareholders and the ability of

the Company to pay down its debt:

I would like to start with our dividend announcement. Yesterday, our Board ofDirectors approved a quarterly dividend of $0.3425 per outstanding share. . . .Consistent with our established balanced capital allocation program, and currentview of continued strong and stable cash flow, we are maintaining our dividend tostockholders.

Throughout 2007, we allocated free cash flow to maintaining a strongdividend program and to servicing our debt, and we invested in growthopportunities such as the Switchboard.com acquisition, and funded it internally withour free cash flow. We achieved all that we said we would do with our capitalallocation program, and we intend to be consistent and steadfast with capitalallocation in 2008.

61. During the same call, however, Jones partially attributed a decline in OIBITDA

margins to “additional exposure in bad debt.” Jones also blamed “economic softness in the second

half of 2007 continuing into the first half of 2008” for the Company’s expectation of “slightly lower

amortized multi-product revenues” without disclosing defendants were also extending credit to

customers they knew were subject to a heightened risk of non-payment and that all collection efforts

relating to past due accounts had been suspended as outlined in ¶¶132-134, 144-145.

62. During the February 7, 2008 conference call, Harless however, assured investors that

defendants had plans in place to lessen the impact of a general economic downturn on Idearc’s

financial results:

Thank you, and let me just address the performance attributing to the generaleconomic downturn. You know, we acknowledge those current conditions, and wehave a number of initiatives in place to mitigate that impact. . . . We’ve gone outwith offering more bundled Internet and print products; we’re offering more paperand ink; as you know, that’s a way to ensure that we provide improving valueproposition to our advertisers.

- 23 -506038_1


We improved our Management organizational structure there. I would tellyou that I’m beginning to see some traction on the different changes that we’vemade, but as you know, in this business, it does take some time before we reap thebenefits.

In fact, Jones told investors the degree of decline in customers was getting better:

Yes with respect to local, we actually in 2007 have seen an improvement inour advertiser counts to the degree of decline in that count, much more in line withsort of a flat view, slightly down in our customer count. And what we’re feeling ismore decrease or reductions in program in this economic tough, in the economictimes. It’s not a matter of actually losing the advertisers. The ones that we havelost have been on the low-end side of the business. We have mitigated the degree ofloss in that channel at this point; we’re continuing to make progress with some ofthe offers that we’ve made there to get them a better value proposition such as theystick with us as we move forward.

63. Also during the February 7, 2008 conference call, Jones addressed the issue of

collecting revenues from customers after Idearc spun off from Verizon:

With respect to the national channels and the influence on the workingcapital, that actually is not, certainly the decline in the revenue or the influence onthe revenue impacted the cash because it is, like you say, more of a upfront cashaspect to the business. But the activity in the receivables account and the activity inthe working capital was more influenced by an item I believe we’ve spoken aboutbefore, which was the transition away from TELCO billing under the Verizonumbrella to our own direct billing. And if you understand the way the dynamics ofthe TELCO billing worked underneath Verizon, we were getting our money in 30days in the settlement process irrespective of when the customer or the clients wereactually paying that bill.

As we moved away from TELCO settlement process to direct billing, we sawan increase in our days’ sales outstanding from that activity because we wererelying on the actual timing of the cash in from the customer. And so we did see aone time bump up in working capital associated with the increase in days’ salesoutstanding on the receivables side.

We’ve seen the collection activity and those days’ sales outstanding flattenout as we’ve gotten to the end of the year, so we are optimistic that the cash flowswill not see that additional impact as we look into 2008.

* * *

[YJou won’t see the same investment required in working capital associated withthat particular item. Days’ sales outstanding are going to move around, but we had aone-time bump in days’ sales outstanding as a result of the transition to the directbilling.

- 24 -506038_1


64. During the February 7, 2008 conference call, Natixis Securities analyst Jeff Shelton

expressed concern about the timing of the impact of this change in billing:

[I]f I look at the cash flow from operations in the fourth quarter, it seemed to havebeen impacted on the negative side from a big change in working capital. You didtalk earlier about the billing changeover, but that was really a second quarterevent. Is there a timing issue involved in the fourth quarter, and we should seesome reversal in the first quarter?

Jones responded:

Yes, I think the best way to look at the cash flow I think is taking a look at thefull annual levels, and adjusting for the transition items and then the element of thedays’ sales outstanding and the shift from TELCO Billing to direct billing. I thinkit’s a better view from the full year as opposed to looking at the individual quarter,because there are some timing aspects there.

65. Once again, analysts wanted to know the status of Idearc’s bad debt during the

February 7, 2008 conference call. Bear Stearns analyst Meredith Allen asked, “And then where does

your bad debt stand now in terms of percentage of sales?” Jones responded:

Yes, we booked up a little bit in the fourth quarter. We ended the year witha 5% accrual rate, and we feel like that’s the appropriate level as to where we’re atin the current circumstance we’re in. If you recall, we’d been looking to get at thatparticular element of our cost structure, and we continue to do so. We’ve put someinitiatives in place, call in earlier, addressing concerns or customer we might haveconcerns with in a faster and more complete fashion earlier in the process. . . .

But having said that, you’ve got the economic conditions and thecircumstance that provides a little uncertainty around that, but the 5% level is wherewe’re at right now, and that’s what we’re looking at, I believe somewhere in thatrange for 2008.

66. During the same February 7, 2008 conference call Natixis Securities analyst Jeff

Shelton sought additional information from defendants regarding bad debt:

And a follow-up on a previous question about your provision for bad-debtexpense in the fourth quarter; it was very similar to what you showed in the thirdquarter, but if I recall, the third quarter was sort of a one-time step-up because ofthe billing switch-over. Are you seeing increased delinquencies from your existingaccounts that’s causing you to be more cautious on that line?

And once again, Jones provided false assurances to the market:

- 25 -506038_1


Well, I think with respect to the days’ sales outstanding and the risk profilesof our accounts receivable, we felt like getting to the 5% level for the full year inbad debt was the appropriate thing to do, and that’s why you did see an additionalbooking in the fourth quarter. Like I said earlier, we’ve got some initiatives in place,some activities underway in the collection side as well as the credit, so we believethat the 5% level is the appropriate one as of the end of the year, and that as welook forward, we believe that it will be in that range, and that some of the initiativeswill start to take effect and start providing us a little more better view with respect tothe bad debt number.

67. Natixis Securities analyst Jeff Shelton followed up:

And if I were to take that out of your G&A for the fourth quarter, it does looklike that your standard G&A spiked up in the fourth quarter. Is there a seasonalelement to G&A, or is that a good run rate going forward into ‘08?

Jones blamed the sale of a print plant:

Okay on a sequential basis. If you’ll recall the third, looking at it on asequential basis, if you recall with respect to the third quarter, you did see, we didhave the benefit of the print plant sale in the third quarter, so that’s causing most ofthe spike. G&A actually without those elements would have seen a slight decline ona sequential quarter base.

68. On February 7, 2008, Wachovia issued an analyst report covering Idearc, repeating

defendants’ representation that the Company’s switch to directly billing customers versus billing

through Verizon had a one-time impact:

FCF [Free Cash Flow] finished the year at $323M, well below our $463M estimate,primarily due to a large one-time use of working capital related to a shift in billingfrom Verizon to IAR’s own direct billing platform.

69. On February 20, 2008, M2 Communications Ltd. published an article via the M2

Presswire. It reported:

Midday trading, Tuesday February 19, 2008, Idearc, Inc. was trading downmore than 8% with almost two times the average trading volume.

Tuesday February 19, 2008, Idearc Inc. announced its Board of Directorsappointed the company’s current Chairman of the Board, John J. Mueller, to theadditional role of Chief Executive Officer, effective immediately. Mr. Muellerreplaces Kathy Harless, who served as President and Chief Executive Officer.

Mueller, citing health reasons, left his new post and resigned from the Board, seven days later.

- 26 -506038_1


70. On February 29, 2008, Idearc filed its SEC Form 10-K for the quarter and fiscal year

ending December 31, 2007. The Company touted its “Strong Cash Flow”:

Our business benefits from a large revenue base, low capital requirements andstrong cash flow. The pre-sold nature of directory advertising provides revenue andcash flow visibility because advertisers generally pay on a monthly basis over the lifeof a print directory, and over the term of Internet advertising, both of which aretypically one year. The capital expenditure requirements of our business are modestand amounted to $46 million, $64 million and $78 million in 2007, 2006 and 2005,respectively representing less than 2.5% of annual operating revenue. As a result, wegenerate strong cash flow to support our balanced capital allocation program toservice our debt, pay dividends and invest in our business.

71. Idearc’s FY07 Form 10-K also discussed the Company’s “Billing and Credit

Control”:

We now direct bill all of our customers. Because most directories arepublished on 12-month cycles, we bill most of our customers over the course of that12-month period. Fees for national advertisers are typically billed upon issue of eachdirectory in which advertising is placed by CMRs, after deducting commissions.Because we do not usually enter into contracts with our national advertisers, we aresubject to the credit risk of CMRs on sales to those advertisers, to the extent we donot receive fees in advance.

We manage the collection of our accounts receivable by conducting initialcredit checks of new customers (under certain circumstances) and, in somecircumstances, requiring personal guarantees from business owners. We check allnew orders from existing customers for payments that are past due prior topublishing the new order. When applicable, based on our credit policy, we use bothinternal and external data to decide whether to sell to a prospective customer. Insome cases, we may also require the customer to prepay part or all of the amount ofits order. Beyond efforts to assess credit risk, we employ collection strategies usingan integrated system of internal, external and automated means to engage withcustomers concerning payment obligations.

72. Despite defendants’ previous statements to the market that Idearc’s transition from

Verizon-backed to direct customer billing was completely reflected in the financials, the FY07 Form

10-K stated:

Our primary source of funds continues to be cash generated from operations.Net cash provided by operating activities of $369 million in 2007 decreased $624million, compared to $993 million in 2006, primarily due to interest payments ondebt incurred of $691 million, transition costs associated with the spin-off, higherbad debt write-offs, and an anticipated increase in accounts receivable resulting

- 27 -506038_1


from our decision to transfer billing from Verizon to our own direct billingplatform. In the past, amounts billed and collected by Verizon were received well inadvance of normal customer payment experience. Now that we are direct billing allcustomers, the new higher account receivable balance represents actual customercollection experience. These unfavorable items are partially offset by lower incometax payments and other working capital items. . . . We expect to experience similarcash outflows in the future.

* * *

We believe the net cash provided by our operating activities, supplemented ifnecessary with borrowings under the revolving credit facility, and existing cash andcash equivalents will provide sufficient resources to meet our working capitalrequirements, estimated principal and interest debt service requirements and othercash needs in 2008.

* * *

Accounts receivable is recorded net of an allowance for doubtful accounts.The allowance for doubtful accounts is calculated using a percentage of sales methodbased upon collection history and an estimate of uncollectible accounts.Management may exercise its judgment in adjusting the provision as aconsequence of known items, including current economic factors and credit trends.Accounts receivable adjustments are recorded against the allowance for doubtfulaccounts. Bad debt expense as a percentage of revenue was 5.0%, 4.3%, and 4.9%for the years 2007, 2006 and 2005, respectively.

73. Idearc’s FY07 Form 10-K further assured investors it took steps to ensure the credit

worthiness of its customers:

Credit risk is held to a minimum level through risk management practice.

Approximately 83.9% of our 2007 directory print products revenue is derivedfrom the sale of advertising to local small-and medium-sized businesses thatadvertise in a limited geographical area. These advertisers are usually billed inmonthly installments and make monthly payments, requiring us to extend creditterms to our customers. This practice is widely accepted within the industry. Whilemost new advertisers and those wanting to expand their current programs are subjectto a credit review, the default rates of small- and medium-sized companies aregenerally higher than those of larger companies. We do not believe that this practicewill have a material adverse impact on our future results. However, we can give noassurances.

The remaining 16.1 % of our 2007 directory print products revenue is derivedfrom the sale of advertising to larger businesses that advertise regionally ornationally. We contract with certified marketing representatives (“CMRs”) whopurchase advertising on behalf of these businesses. We receive payment directly

- 28 -506038_1


from the CMR, net of the CMR’s commission. The CMR is responsible for billingand collecting from the advertisers.

74. Idearc’s FY07 Form 10-K was signed by Gatto and Jones. Furthermore, Gatto and

Jones also signed the Sarbanes-Oxley certifications attesting that they reviewed the contents of the

filing to confirm the “this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under

which such statements were made, not misleading with respect to the period covered by this report.”

These certifications further confirmed Gatto and Jones “[d]esigned such disclosure controls and

procedures, or caused such disclosure controls and procedures to be designed under our supervision,

to ensure that material information relating to the registrant, including its consolidated subsidiaries,

is made known to us by others within those entities, particularly during the period in which this

report is being prepared.” Harless also signed the Company’s FY07 Form 10-K as a Director.

75. The positive statements, assurances and forecasts, outlined in ¶¶58-67, 70-74, made

by defendants were materially false and misleading when made and failed to disclose material



(a) As more fully described in ¶¶131-132, 135, 139-141, defendants knew that

Idearc’s bad debt levels were rising and would continue to rise, in part as a result of the deliberate

elimination of Idearc’s collection department;






from the Verizon-based billing platform to Idearc’s direct billing system was being poorly handled- 29 -

506038_1





debt levels;





76. Defendants’ statements in February 2008 that bad debt expense increased due to a one

time billing event associated with the transition to Idearc’s independent billing system did not

disclose the full truth. While Idearc’s stock price decreased by 36% or $5.52 per share, between the

closing price on February 6, 2008 and the closing price on February 8, 2008, defendants’ statements

tempering this news caused Idearc’s stock to continue to trade at artificially inflated prices.

77. On March 11, 2008, defendants made a presentation to the investment community at

the Bear, Stearns & Co., Inc. Media Conference. Jones participated in the presentation and had the

opportunity to address analysts’ and investors’ questions and concerns about Idearc’s financial

performance and operations. During the presentation, Jones stated:

There continues to be a solid, strong value proposition in the marketplace toour advertising community. It has underlying fundamentals of the business from aninvestment perspective that make it very attractive. Those are not changed, those arenot changed in somewhat challenging economic times that we currently deal with,we still believe that we’re on the right path; that we’re going to be steadfast in thestrategy that we’ve deployed to continue to move Idearc forward; to continue todrive value to the investor community; and to continue to serve our advertisers in thecommunities as we put forth the value proposition. That is what drives ultimatevalue and long-term value for the investor.

78. During the March 11, 2008 presentation, Jones was questioned about the

sustainability of Idearc’s dividend payout to shareholders:

- 30 -506038_1


Can you talk a little bit about the sustainability of your dividend payout? Ithink your yield right now is over 25% or so, and they’ve given in yield, but thequestion is, is it sustainable, and then I have a follow-up.

In responding to the question, Jones stressed that Idearc had a significant cash flow:

With respect to capital allocation, obviously, in this environment – I mean, Italk about the fact that our underlying view of the business and the long-termprospects – all that are unchanged. Well, having said that, obviously, we have to becognizant of the marketplace and what the marketplace is telling us and what’s goingon in the marketplace, and one of those elements is, you know, that does call intoquestion, or an item that has to come under debate is the dividend.

Now, having said that, the board always debates that dividend. The board isalways deliberating with respect to capital allocation, how to deploy capital. Youknow, one of the beauties, and it’s a nice problem to have – we have cash. We have,you know, a good amount of cash available to us. We have to figure, [audiodifficulties] you know, one of the beauties and most efficient and effective fashion.

As far as sustainability of the dividend, and your question with respect to thatin that context and touched on in that vein, a step over sort of to the liquidityrequirements that we have as we look forward over the next several years. In 2008,our mandatory debt repayment is $48 million; in 2009, it is $123 million; in 2010, itis $199 million; in 2011, it is $274 million. Clearly, I don’t have any liquiditydemands with respect to my cash flows as I look out over the horizon.

79. During this same March 11, 2008 presentation, in response to a question regarding

Idearc’s liquidity, Jones again emphasized the Company’s strong financial position in that area:

I don’t have liquidity issues. If anybody didn’t hear that, I don’t have 2008liquidity issues or medium or near-term liquidity issues. Absolutely, I’ve got assetsin this business that have value, they have significant value.

An audience member – part of the investment and analyst community – further pressed the issue:

While you may not have liquidity issues, there are some calculations thatindicate you probably did have to borrow to pay your dividend this last quarter, andthat you did not generate enough free cash flow to pay the dividend last quarter, andexpectations are in the first quarter you may not as well, and while you did have asignificant amount of cash, the acquisition of Switchboard.com used up all but $50million or so of that cash. So I think that’s part of what the market is trying to tellyou is that you don’t have the liquidity that you did have, and there are questionsabout that burn rate, so that’s –

Jones interrupted:

- 31 -506038_1


Right, absolutely, and I think with respect to looking at my cash flow on aquarterly basis, folks need to actually look at my timing on my interest payments andmy bond payment occurs twice a year in fourth quarter and second quarter. So mycash flows are going to be some – have some measure of seasonality about them. So,absolutely, there are going to be ups and downs in the absolute cash flows. But whenyou look at that picture from a total perspective – look at any of the public forecastswith respect to my business, around that, and you compare that against mymandatory debt requirement, I don’t think you come to a different conclusion thanthe ones that I just reiterated.

80. During defendants’ presentation to investors and analysts at the March 11, 2008 Bear,

Stearns & Co. Inc. Media Conference, an audience member questioned Jones as to whether it would

be more beneficial to the Company to use its cash flow to buy back some of its debt at a discount

rather than pay such large dividends to shareholders. Jones responded:

With respect to being able to step into that marketplace and take advantage ofsome of the economics around that, I do have some tax limitations as a result ofcoming out of the spin. Part of the spin, you know, it wasn’t quite – it was a tax-freespin, and it also involved a tax-free debt exchange, and so the tax-sharing agreementbetween us and Verizon put some limitations around that under the IRS regulations,around what we can do with respect to that debt.

* * *

But, certainly, what’s happening in the marketplace, in the debt markets, isnot lost on us, but we do have some limitations in our capacity to respond to what’sgoing on in those environments.

81. Before the close of defendants’ presentation at the March 11, 2008 conference, a

member of the investment and analyst community asked about the potential for Idearc’s bad debt

increasing:

And then one other question here – working capital was – do you foresee thatbeing a source or use of cash in 2008? I think it was $300 million of use in 2007,possible bad debt increasing, et cetera?

Jones blamed “one-time items” for any reduction in working capital – and failed to disclose bad debt

had been increasing due to the Company’s relaxation in credit and collections policies:

Yeah, there are actually a couple of dynamics, two of the major elements inmy working capital were one-time items. We talked about on the call the fact that wehad the shift from Verizon or telco billing to our own direct billing and a ramp in

- 32 -506038_1


day sales outstanding associated with that. And then you had some geography onthe statement – on the cash flow statement between deferred taxes and that as a resultof FIN 48 and the way that flows through the cash flow statement – so along with theactivity around the transition costs.

As we look into 2008, we see all those elements and that they have stabilized.We see our day sales outstanding and our working capital being relatively stable aswe look out. We don’t expect any significant use of cash from a working capitalperspective . . . .

82. The next day, March 12, 2008, defendants made another presentation to members of

the investment and analyst community at the Lehman Brothers High Yield Bond & Syndicated Loan

Conference. Jones reiterated that Idearc did not have any liquidity issues, and that customer demand

and sales remained strong:

I will point to the fact that I do not have liquidity issues in ‘08 by any means. I donot have – I do not foresee liquidity issues in the near term as I look into ‘09 andbeyond. I do believe this business is going to weather the storm. It is going to comeout of the back end of the economic challenges that we’re doing and we’ve got tomaintain and be steadfast in the strategy that we have in place, such that we get backon this trend line that you were seeing as you moved through first half of ‘07. That isour challenge and that is the focus of this – the management team and the entire workforce at IDEARC is to drive this business back to where it needs to be.

* * *

I would also say that from a sales perspective, as we look at it right now, onthe .com side, the sales side of it, the feedback and the performance based advertisingprograms, we’re getting great results. We still see significant demand. We’ve stillgot to solve the other half of that equation and get it monetized and get it past outthere and continue with the transformation of the business from fixed-fee to pay-per-click. All those dynamics play in.

But from a marketplace perspective, those offerings are still very robust. Andeven on the print side, I’ve got pockets where I’m not necessarily feeling as much ofthe economic situation, where we continue to make the progress we’d like to make.

83. During the March 12, 2008 presentation, Jones acknowledged Idearc’s capital

allocation was a significant area of investor and analyst concern, and again emphasized Idearc’s cash

flow was strong:

With respect to capital allocation and it’s obviously a big topic for a lot of folks,and that includes my Board and they assess that on an ongoing basis, continuous

- 33 -506038_1


basis. And I’ve spoken on several occasions about capital allocation programs andbeing steadfast in our approach to that and how we look at it, and trying to strike abalance.

* * *

I will say with regard to that, the beauty of this business is that it is nice tohave capital allocation discussions because I’ve got sufficient cash to do so, andnot have liquidity requirements in the near term. So I have to have these debatesand the Board will continue to have these debates and we’ll evaluate all aspects of itfrom the dividend all the way through the debt side as well as the opportunities toinvest and improve the business fundamentals.

And so maintaining flexibility and providing – ultimately, providing returnsto all the investor community and ensuring the viability of this enterprise are thekey characteristics that we look at when we evaluate what the alternatives are asfar as capital allocations.

84. On March 27, 2008, Business Wire, Inc. published an article entitled “Idearc

Executive Tells Investors Underlying Business Fundamentals Sound.” The article stated that “Idearc

Inc.’s acting chief financial officer, Samuel ‘Dee’ Jones, presenting at the Credit Suisse 2008 Global

Leveraged Finance Conference in Scottsdale, Arizona,” represented:

Mr. Jones made it clear that he does not foresee any near-term liquidityissues for the Company. Regarding capital allocation, Mr. Jones told investors thatthe Idearc Board of Directors has decided to eliminate payment of dividends as partof the current capital allocation program and focus on improving the Company’srisk profile.

“This approach allows us to maximize flexibility as we work our way througha more challenging economic environment,” Mr. Jones explained. “While the Boardcertainly has the discretion to resume paying dividends in the future, it is keenlyfocused on an appropriate capital allocation program and risk profile for theenterprise. In light of current market conditions, we firmly believe this is the mostfinancially prudent approach to capital allocation.”

Mr. Jones also told conference attendees that local media, and directionalmedia in particular, continues to be a large and growing market. He said theCompany has a number of initiatives in place to help mitigate the impact fromcurrent cyclical economic headwinds and the objective is to protect Idearc’scustomer base.

“We are managing our print business with opportunities to improveperformance as we move through 2008. We are confident the multi -platform

- 34 -506038_1


strategy will bring long-term value to stockholders, sales leads to advertisers andrelevant local results to consumers,” he concluded.











reported to the market were grossly understated; and

(c) Further contributing to the increasing bad debt levels were defendants extreme

relaxation of Idearc’s credit policies, as described in ¶¶132-134, 144-145.

86. Defendants’ statements in March 2008 caused Idearc’s stock to continue to trade at


87. On May 6, 2008, defendants reported the Company’s 1Q08 financial results and

hosted a conference call with analysts and investors to discuss these results. Jones and Gatto

participated in the call and had the opportunity to address analysts’ and investors’ concerns

regarding Idearc’s financial results and operations. Gatto opened the call, stating:

I would like to start today’s call with a view from a total company perspective. First,we firmly believe in the set of assets that makes this business an attractiveinvestment. Second, our business fundamentals are still sound and solid. Third,we have a strong multiproduct strategy that enables us to compete effectively in thecurrent economic environment and at the same time drive the business into thefuture.

- 35 -506038_1


* * *

The print business, which accounts for the majority of our revenue,remains a strong cash flow business. Despite the cyclical economic headwinds wefaced in the first quarter, we remain committed to our multiproduct strategy. We metcustomer demand by expanding our print offerings with initiatives, includingexpanded content offers to our [core] books, increased penetration in companiondirectories and new direct mail products.

88. On May 6, 2008, Gatto also addressed the importance of the growth of Idearc’s

internet business:

On the Internet side, there is tremendous demand in the marketplace for ourperformance-based Internet products. Capitalizing on this demand and monetizingthose products are critical to the growth of the Internet business.

89. As in past conference calls, on May 6, 2008 the market expressed interest in Idearc’s

level of bad debt. Goldman Sachs analyst Peter Salkowski asked:

And on bad debt side, you mentioned credit cancels and things like that. What wasyour bad debt as a percentage of revenue in the quarter?

Jones conveyed the current level of bad debt, but failed to disclose why it was increasing:

In the quarter, we accrued at a 5% rate. We had write-offs in the 4.25%range. We are accruing a little bit higher than what the actual experience wasbecause we are a little bit cautious about the economic environment that we aredealing with, but as we have said before, we expect the full year in that 5% range andI think from what we are seeing at this point, we are still comfortable with that.

* * *

Bad debt within the G&A line was up $7 million or so. With respect to the –but on the flip side of that, some offsetting and pluses and minuses. We did addsome good cost control initiatives around employee-related expenses and contractservices and those sorts of things. They gave us some favorability in the quarter onG&A.

* * *

With regard to the G&A in the quarter, we did have, against pro formaresults, about $15 million or so of one-time items influencing those results to offsetthe bad debt increase and then we had some additional favorability that helped as faras employee-related costs.

- 36 -506038_1


90. During the May 6, 2008 call, Morgan Stanley analyst Steve Flynn expressed concern

regarding Idearc’s bad debt at the present and in the future:

[W]ith regard to the bad debt expense, it looks like you guys were accruing about5.8%. It looks like it was 4% for the first two quarters last year, stepping up to5.8% as a percentage of revenues and then 6.4% in the fourth quarter, but nowyou’re back down to 5.0%. Am I looking at that correct? Why – are the resultsbetter than expected? Is the economic impact not having the impact that you thoughtit did? Can you talk about that trend and where you see that going forward?

Jones falsely assured the market that the transition of Idearc’s customers to a direct billing system

had caused an increase in bad debt levels, but that the time it took customers to pay their bills was

leveling out:

Yes, Steve, with respect to the back half of last year, some of thoseadjustments were made because of the transition to a direct billing relationshipwith the customer as opposed to using telco billing and what we were seeing withour days sales outstanding as we moved through the back half of ‘07. So we adjustedthe accrual rates to get to a total year of about 5% on the accrual level in 2007.

What we have seen with respect to days sales outstanding is a relativelyflattening out of that as we’ve moved beyond that transition activity and we havecontinued that 5% level in the first quarter. We had write-offs that were a littlebetter than that. If you look at the cash flow statement, you can derive that, but weare a little bit cautious with respect to the economic environment such that wemaintain that 5% accrual level.

91. Morgan Stanley analyst Steve Flynn asked a follow-up question regarding Idearc’s

bad debt:

It sounds like most of the change to 5% was a change in systems absent anysort of economic changes and even that 5% you think it is a pretty good rate evengiven some of the economic challenges?

Jones responded:

Yes, as I said before, I think that 5% rate is where we should be parked rightnow and we will assess it as we move through the remainder of the year.

92. During the May 6, 2008 conference call, defendants discussed the need to avoid

taking any action that would jeopardize the tax-free status of Idearc’s spin-off from Verizon. Wolf

Point Capital analyst Brian Shinderlee asked:

- 37 -506038_1


Given your existing run rate and what appears to be very significant levels of freecash flow this year, curious as to the interplay of the amortization that is upcomingon the A loan versus the tax-sharing agreement. And I thought I had it correct that ona prior conference call, you had mentioned that effectively to the extent you want topay down debt early, you would need to pay down A loan. Is that – could you clarifythat?

Jones responded:

Yes, term loan A – under the tax-sharing agreement, term loan A is the onlytranche of debt without going through a lot of other hoops and some tax, looking fortax Safe Harbors and those sorts of things and working with Verizon, term loan A isthe only one that we can pay down early.

* * *

At this point, I think that is where our head is at, but I will say that wecertainly continue to evaluate other opportunities with respect to that capital structureand as we move forward, we will keep looking at those opportunities and what theeconomics mean to us relative to the positions with regard to the tax-sharingarrangements and our opportunities to get at that safely.

93. In response to a question by KBC Financial analyst Avi Steiner during the May 6,

2008 conference call regarding the Company’s plans for capital allocation, Jones emphasized the

significant benefits of Idearc’s high level of cash flow:

With respect to capital allocation and the announcement we made at the endof March with respect to the dividend and that aspect of things, I think the focus isright now to improve the risk profile of the business and maintain flexibility bybuilding cash on the balance sheet at this point. We certainly evaluate opportunitiesto economically and efficiently change the capital structure of the business, butbuilding cash on the balance sheet effectively improves that risk profile andwanting to maintain flexibility with respect to how we actually utilize that cash as weget clearer on the economic picture and the credit market environment as we moveforward.

94. On May 8, 2008, defendants filed Idearc’s SEC Form 10-Q for the quarter ending

March 31, 2008. The 1 Q08 Form 10-Q informed investors bad debt was rising, but failed to disclose

the true reasons why:

General and administrative expense of $79 million in the first quarter of 2008decreased $27 million, or 25.5%, compared to $106 million in the first quarter of2007. The decrease was largely the result of a reduction in stock-basedcompensation expense of $17 million associated with our lower stock price.

- 38 -506038_1


Additionally, we had lower transition costs associated with our spin off from Verizonand lower employee related costs. These reductions were partially offset by higherbad debt and severance costs. Bad debt expense of $39 million in the first quarterof 2008, increased by $7 million, or 21.9%, compared to $32 million in the firstquarter of 2007. Bad debt expense as a percent of total operating revenue was5.1 % for the first quarter compared to 4.0% for the first quarter of 2007.

95. The 1 Q08 Form 10-Q confirmed the Company’s cessation of a dividend payment to

shareholders, yet assured investors it would have no problem meeting its “cash needs” for at least the

next year:

On March 27, 2008, we announced the decision by our Board of Directors toeliminate the payment of dividends as part of our current capital allocationprogram.

We believe the net cash provided by our operating activities, supplemented ifnecessary with borrowings under our revolving credit facility, and existing cash andcash equivalents will provide sufficient resources to meet our working capitalrequirements, estimated principal and interest debt service requirements and othercash needs for at least the next 12 months.

96. Idearc’s 1 Q08 Form 10-Q was signed by Gatto and Jones. Furthermore, Gatto and





These certifications further confirmed Gatto and Jones “[d]esigned such disclosure controls and




report is being prepared.”

97. The positive statements, assurances and forecasts, outlined in ¶¶87-91, 93-96, made

by defendants were materially false and misleading when made and failed to disclose material

- 39 -506038_1
















debt levels;


relaxation of Idearc’s credit policies, as described in ¶¶132-134, 144-145;

(e) Defendants’ decision to cancel the stockholder dividend payment was

necessary because of the lower cash flows the Company was experiencing due to increasing bad debt

levels; and

(f) As described in ¶¶155-186, Idearc’s financial statements were false and


98. Defendants’ statements in May 2008 caused Idearc’s stock to continue to trade at


- 40 -506038_1


99. On June 2, 2008, Business Wire, Inc. reported, “Idearc Names Scott W. Klein Chief

Executive Officer.” The article stated the following regarding the appointment of Klein:

Idearc Inc. (NYSE: IAR) announced the appointment of Scott W. Klein asChief Executive Officer, effective immediately. Klein, 50, also becomes a memberof the Idearc Board of Directors. Frank P. Gatto, who has served as interim ChiefExecutive Officer since February 27, 2008, resumes his position at Idearc asExecutive Vice President – Operations.

“Idearc is a company with extraordinary people and a loyal customer base. Ilook forward to leading this great team and to finding new ways to drive profitablerelationships between buyers and sellers,” said Klein. “As the marketplace continuesto evolve, we will leverage our expertise and accelerate our innovativeness tosuccessfully take advantage of market changes.”

INVESTORS BEGIN TO LEARN THE TRUTH

100. On July 29, 2008 defendants reported Idearc’s 2Q08 financial results and hosted a

conference call with analysts and investors discuss these results. Jones and Klein participated in the

call and had an opportunity to address analysts’ and investors’ questions and concerns about the

Company’s financial performance and operations. During the call, Klein stated:

I’ve now been on the job for eight weeks . . . .

I’m disappointed that the Company got into the shape it was in when I arrived, butwe have a team of committed leaders that are ready to do the things that need to bedone to correct our situation. They’re determined to succeed, and have already madesignificant changes that are already making a difference.

My comments to all of you on these calls will always be direct,straightforward and focused on telling it like it is. This CEO will take responsibilityfor his actions and not look for excuses. I’m holding my leaders to the samestandard, because our future is in our hands. We’ll take credit when it is due andtake the blame should it ever be required.

* * *

Since there’s so much to do here at Idearc, I have organized our focus onthree key transformational initiatives. The first is all about accelerating revenuegrowth, second is improving margins and reducing expenses, and the third is allabout building a high performance culture.

* * *

- 41 -506038_1


We need to increase our focus on accounts receivable because, as you allknow, in these kinds of economic times this becomes an important measure ofperformance for our company. We need to make sure that our credit policies are inplace, and we’ve already done that. We’ve also taken steps to step our collectionefforts up.

* * *

In summary here, we’ve committed to expense savings that exceed 10% ofour total expense base of $1.6 billion on a go-forward basis. Over $50 million of thiswill be reflected in our results over the balance of the year, since most of our plansare well under way.

* * *

In closing, I want you all to know the problems are clear and the solutions arein motion. Speed is everything, and we are committed to catching up quickly–veryquickly. Our organization at the most senior level will be finalized this quarter. Ourability to deal with our debt obligations is absolutely secure. We’re all committedto proving ourselves worthy of your trust, support and confidence.

101. During the July 29, 2008 conference call, Jones discussed the decline in Idearc’s

revenue:

On a year-to-date basis, we reported multi-product revenues of $1.529 billion, whichis a 5.1 % decrease compared to the same period in 2007. . . .

We reported second quarter 2008 multi-product revenues of $759 million, which is a5.7% decrease compared to the same period in 2007.

Jones also partially revealed the extent to which the increase in Idearc’s bad debt provision was

having a negative impact on the Company’s financial condition:

In addition to the revenue declines previously discussed, the primary driverin the EBITDA change, both for the quarter and on a year-to-date basis, waschanges in our bad debt provision. We talked about an increase in our bad debtprovision in the first quarter to 5%. Based on write-off experience through thesecond quarter, we increased our provision to approximately 6.25% in the secondquarter, resulting in a year-to-date provision rate of 5.7%, versus bad debt provisionrates of slightly over 4% in 2007.

This change drove the majority of the variance in the G&A expense line forthe quarter and on a year-to-date basis. There was also some measure of expensetiming impact in the second quarter, such that we believe our year-to-date results aremore indicative of ongoing margin levels.

- 42 -506038_1


102. During the July 29, 2008 conference call, Jones also represented to investors that

Idearc would continue to make its debt payments and was not facing liquidity issues:

Our free cash flow for the six months ended June 30th, 2008 was $151million based on cash from operating activities of $176 million less capitalexpenditures of $25 million, resulting in an end-of-period cash balance of $127million. Within these results, we had cash interest of $327 million and cash taxes of$116 million. As we have discussed before, we foresee no near-term liquidity issuesand continue to be confident in our ability and capacity to service our debt.

103. Klein told investors during the July 29, 2008 conference call that the “current

advertising downturn” was not the reason Idearc’s financials were slipping:

I think that the Company has been its own worst enemy in this regard. As Imentioned, we have about 800,000 customers or clients today. There are more than12.5 million out there. So, figuring out how to better penetrate the total marketplaceinstead of just the markets that we’ve gone after in the past is key to our success.

At the same time, in markets where we’re not actually publishing books, wehave a very aggressive telesales force focused on Internet sales in an effort to growand expand the business in those out-of-book markets as well. So, I’m not reallyready at this point to concede our issues and problems to the vagaries of arecessionary economy. As [Defendant] Dee [Jones] mentioned, we can do a betterjob of selling, and we will.

104. During the same July 29, 2008 call, in response to further analyst questioning

regarding bad debt, Jones stated:

[T]he vast majority of [the increase in expenses in the quarter on the G&A line] isthe increase in the bad debt provision, along with some collection costs and outsidecollection agency fees that we also incurred in shoring up our credit and collectionactivity. It was also some small amount of timing around a couple of items that wedid incur in the second quarter, but the vast majority of it was the bad debt.

105. During the July 29, 2008 conference call, Credit Suisse analyst Bob Kricheff

specifically asked about the Company’s credit policies and the impact of those policies on the bad

debt:

And this rather dramatic increase in bad debt from a year ago, obviously theeconomy is not great out there, but is this partially your credit practices? Are therethat many customers that were bad debt? And how are you going to be able to growyour revenue if there are that many customers that are not paying I guess is sort ofthe other concern.

- 43 -506038_1


Klein responded:

Yeah, Bob, it’s Scott. Quite simply, our credit practices a year ago were notwhat they should have been. The credit policy was not as tight as it needed to be.And as is the nature of our business, it will take some time for some of thosemistakes that were made to work their way through the system. But rest assured, ourcredit policy is appropriate today and as tight as it should be, and our credit andcollections team is all over this, having put in place some very new and creativeways to perhaps collect money that much more quickly.

Analyst Bob Kricheff followed up:

Do you perceive bad debt remaining in that 6% range for the balance of theyear, or should we start to see those improvements already in the second half of theyear?

This time, Jones responded:

As you know with bad debt and that aspect of things, it does take time toimpact things. I think the year-to-date rate of 5.7% – we’ll continue to assess andwatch our write-off rates with respect to that. As I did mention, the second quarterdid see a step-up in the write-off rates. But, in that range of the 5.7%, 6.25% is whatwe’re kind of looking at, and we’ll continue to assess it as we look through theremainder of the year.

106. Following this exchange during the July 29, 2008 conference call, Klein stated:

Bob, I’d also mention that we will continue to monitor our credit policyclosely. We also don’t want to hamstring ourselves here, and we want to make surethat, with long-term advertisers that are feeling some effects of the economy, that wework with them to give them the fuel that they need to continue to propel theirbusiness into the future. We want to be a good partner, and we also want to do theright thing for the Company.

107. Just two days later, on July 31, 2008, Deutsche Bank issued analyst report covering

Idearc, headlined “Top Line Erosion Accelerates; Bad Debt Rising.” The report stated:

On July 29, 2008, Idearc (IAR), publisher of Verizon Yellow Pages andoperator of online directory site Superpages.com , reported results for the secondquarter of 2008 that fell short of our expectations. Consolidated (multi-product) netrevenues came in at $759mm for the three month period, a decline of 5.7% from thesecond quarter of 2007. Top line erosion combined with an increase in bad debtexpense were the main culprits behind a material (19.2%) fall-off in EBITDA. . . .

While the company continued to point to the impact of the difficult advertisingenvironment on its top line, newly appointed CEO Scott Klein sang a bit of adifferent tune regarding the cause of Idearc’s bleak performance than we have heard

- 44 -506038_1


in the past. Klein, who was appointed CEO in June and brings a fresh set of eyes andperspective to the company, charged that IAR has several internal issues andinefficiencies which have been hampering its performance on top of the softeconomy.

* * *

After a sharp reduction in costs in the first quarter (a portion of which wasone-time in nature), costs jumped in 2Q as a result of increased bad debt expenselevels. Idearc increased its bad debt provision to 6.25% in 20 which is up from 5%in the first quarter 2008 (resulting in a 5.7% YTD rate) and 4% in 2007.Management noted that its prior credit policies were not as tight as they shouldhave been and while more stringent procedures have been put in place and thecollections team is working to collect money more quickly, it will take some timefor prior mistakes to work their way through the system. Along with a higher baddebt provision, collection costs and outside collection agency fees as well as thetiming of some expenses contributed to this year-over-year G&A increase. Lookfor bad debt to continue negatively impacting Y-o-Y comparisons for the next couplequarters.

108. In a July 31, 2008, Dow Jones Factiva/Reuters article entitled “Earnings miss spooks

Idearc bondholders,” analysts were quoted as saying the following:

“ They were supposed to be cash flow machines, unfortunately now it’squestionable cash flow relative to the amount of debt they have,” said KingmanPenniman, president of high-yield research firm KDP Investment Advisors.

Idearc has about $9 billion in debt, including a credit facility, two term loansand senior unsecured notes.

* * *

“The results are not good news for investors. Still, we think that the currentcredit valuation overstates the risk for credit investors because of the free cash flowgeneration of the business, CreditSights” [analyst Jake Newman] said in a report.

109. On August 11, 2008, defendants caused Idearc to file its SEC Form 10-Q for the

quarter ending June 30, 2008. Defendants reiterated the information they had conveyed to investors

as part of their partial disclosure on July 29, 2008:

In the second quarter of 2008, the Company began implementing strategicorganizational and market exit initiatives to improve ongoing operational efficienciesand reduce total operating costs. As a result, the Company recorded a restructuringcharge of $7 million associated with one-time termination benefits impacting

- 45 -506038_1


approximately 350 employees. This charge was recorded to general andadministrative expense in the statements of income.

110. In this 2Q08 Form 10-Q, however, defendants reiterated in Idearc’s 2Q08 Form 10-Q

that the Company’s cash needs would be met for at least the next year:

Our primary source of funds continues to be cash generated from operations.Net cash from operations of $176 million for the six months ended June 30, 2008,increased $38 million compared to the six months ended June 30, 2007. Thisincrease was the result of reduced interest payments on debt, lower transition costsand income tax payments, partially offset by lower collections associated withdeclines in revenue.

On March 27, 2008, we announced the decision by our Board of Directors toeliminate the payment of dividends as part of our current capital allocation program.

We believe the net cash provided by our operating activities, supplemented ifnecessary with borrowings under our revolving credit facility, and existing cash andcash equivalents will provide sufficient resources to meet our working capitalrequirements, estimated principal and interest debt service requirements and othercash needs for at least the next 12 months.

111. Idearc’s 2Q08 Form 10-Q was signed by Klein and Jones. Furthermore, Klein and





These certifications further confirmed Klein and Jones “[d]esigned such disclosure controls and




report is being prepared.”

112. The positive statements, assurances and forecasts, outlined in ¶¶100-107, 109-111,

made by defendants were materially false and misleading when made and failed to disclose material

- 46 -506038_1






elimination of Idearc’s collection department. By the end of June 2008, bad debt accounts had

grown to $250-$270 million Company-wide;





(c) Further contributing to the increasing bad debt levels were defendants extreme


(d) As described in ¶¶155-186, Idearc’s financial statements were false and


113. Despite the partial disclosures by Klein and Jones that increased bad debt was having

a significant, negative impact on Idearc’s financial position, defendants still failed to disclose the full

truth. As a result, on July 29, 2008, the price of Idearc stock closed at $1.32 per share, down from

$2.20 per share the day before, after extremely heavy trading volume of over 23.5 million. Because

the truth was not fully disclosed, however, Idearc stock continued to trade at artificially inflated

levels.

114. Then on October 30, 2008, almost two years to the day after the tax-free spin-off

from Verizon, Idearc issued a press releasing announcing its 3Q08 and year to date financial results.

The article quoted Klein as saying:

- 47 -506038_1


“Idearc’s financial results in the third quarter reflect the significant challengesour clients are facing as they contend with difficult economic conditions across thenation . . . . We remain focused on accelerating revenue, reducing expenses andimproving margins, as well as creating a high-performance culture. We are actingaggressively and quickly to adjust our organization and market approach to meet thechallenges ahead of us.”

Defendants also reported the following financial highlights for 3Q08 and nine months ended

Sept. 30, 2008:

On a year-to-date basis, Idearc reported multi-product revenues of $2,264million, a 5.7 percent decrease compared to the same period in 2007. Year-to-dateInternet revenue was $223 million, a 6.2 percent increase compared to the sameperiod in 2007.

The Company reported third quarter 2008 multi-product revenues of $735million, a 7.1 percent decrease compared to the same period in 2007. The Companyreported Internet revenue of $75 million in the third quarter, an 8.7 percent increasecompared to the same period in 2007.

The Company reported year-to-date earnings before interest, taxes,depreciation and amortization (EBITDA) of $ 956 million, a 12.9 percent decreasecompared to the same period in 2007. Reported year-to-date EBITDA margins were42.2 percent, compared to 45.7 percent in the same period in 2007. On an adjustedpro forma basis, year-to-date EBITDA was $985 million, a 15.7 percent decreasecompared to the same period in 2007. Adjusted pro forma EBITDA margins were43.5 percent, compared to 48.6 percent in the same period in 2007.

The Company reported third quarter EBITDA of $ 298 million, a 21.6 percentdecrease compared to the same period in 2007. The Company reported EBITDAmargins of 40.5 percent in the third quarter, compared to 48.0 percent in the sameperiod in 2007. On an adjusted pro forma basis, third quarter EBITDA was $302million, a 24.1 percent decrease compared to the same period in 2007. Adjusted proforma EBITDA margins were 41.1 percent in the third quarter 2008, compared to50.3 percent in the same period in 2007.

The Company reported year-to-date net income of $ 260 million, a 21.0percent decrease compared to the same period in 2007. On an adjusted pro formabasis, year-to-date net income was $279 million, a 25.4 percent decrease versus thesame period in 2007.

The Company reported third quarter net income of $73 million, a decrease of37.6 percent versus the same period in 2007. On an adjusted pro forma basis, thirdquarter net income was $76 million, a decrease of 40.6 percent versus the sameperiod in 2007. Free cash flow for the nine months ended September 30, 2008 was$340 million based on cash from operating activities of $377 million, less capitalexpenditures of $37 million.

- 48 -506038_1


Multi-product advertising sales for the third quarter declined 10.8 percent comparedto 2007.

115. Defendants also informed investors that they had drawn down an astonishing $247

million from Idearc’s $250 million revolving credit facility, despite the Company reportedly having

$304 million of cash on its books:

Update on Liquidity and Capital Structure

As of September 30, 2008, Idearc had cash and cash equivalents of $304million. On October 24, 2008, the Company initiated borrowings of $247 millionunder its existing $250 million revolving credit facility. Idearc intends to use thefunds from the revolving credit facility for general corporate purposes.

The Company has retained Merrill Lynch & Co. and Moelis & Company asfinancial advisors in connection with the review of alternatives related to theCompany’s capital structure. There can be no assurance that the Company willpursue transactions related to any such alternatives.

“Our objective is to maximize opportunities to help ensure that Idearc has anappropriate capital structure to support our strategic business objectives,” Klein said.“We intend to look closely at all available opportunities to strengthen our balancesheet and improve our risk profile. At the same time, we will continue to manage ourfinancial resources prudently, with a focus on maintaining sufficient liquidity andflexibility as we work our way through the current challenging economicenvironment. Fortunately, Idearc continues to generate significant cash flow.”

116. Defendants also disclosed that Idearc’s stock faced delisting by the NYSE:

New York Stock Exchange Listing

On October 24, 2008, the Company received notice from the New York StockExchange (“NYSE”) that it is not in compliance with NYSE continued listingstandards because the 30 trading-day average closing price of the Company’scommon stock was less than $1.00 per share. Under applicable NYSE rules, theCompany generally has six months to return to compliance with this requirement.

117. That same day defendants hosted a conference call with analysts and investors to

discuss Idearc’s 3Q08 earnings. Klein and Jones participated in the call and had an opportunity to

address analysts’ and investors’ questions and concerns about the Company’s 3Q08 results and

operations. During the call, Klein stated:

- 49 -506038_1


Total revenues declined 7.1 % in the third quarter and 5.7% year-to-date. Year-to-date internet revenues were up 6.2% and up 8.7% in the third quarter.

Adjusted EBITDA declined 24.1% in the quarter and 15.7% year-to-date,primarily driven by declining revenue and increased bad debt expense. Clearly,these results are disappointing. But let me be clear. Our recent financialperformance – and this is important to understand – does not yet reflect most of theactions we’ve undertaken to address the significant challenges we’re facing as aCompany as our clients contend with difficult economic conditions across the nation.

* * *

Also included in changing Idearc for the better is addressing our capitalstructure challenges. As mentioned in the release this morning, we’ve retainedMerrill Lynch & Company and Moelis & Company as financial advisors inconnection with the review of alternatives related to our capital structure. Ourobjective is to help ensure that Idearc has an appropriate capital structure to supportour strategic business objectives. We intend to look closely at all availableopportunities to strengthen our balance sheet and improve our risk profile.

In the earnings release, we noted that the Company had cash and cashequivalents of $304 million as of September 30th, 2008. In addition, on October24th, 2008 the Company initiated borrowings of $247 million under our existing$250 million revolving credit facility. We did this to increase our cash position andpreserve our financial flexibility during these challenging economic times.

Fortunately, despite the challenging economic environment, we continue togenerate a significant amount of cash. We intend to manage this cash prudentlywith a focus on maintaining sufficient liquidity and among other things, flexibilityin reinvesting in the business when it is appropriate to do so.

In the release we distributed this morning, we also mentioned that wereceived notice from the New York Stock Exchange that we . . . are not incompliance with New York Stock Exchange continued listing standards becausethe 30-day trading average closing price of our common stock has fallen below $1.00per share.

118. During the October 30, 2008 conference call, Jones attributed much of the EBITDA

decline to “changes in our bad debt provision,” and stated:

With regard to bad debt, our provision in the third quarter was 8.2%. Theyear-to-date provision of 6.5% compares to the provision rate of 4.6% for the sameperiod in 2007. This change drove the majority of change in the G&A expense linefor the quarter and on a year-to-date basis.

- 50 -506038_1


119. During the October 30, 2008 conference call, Goldman Sachs analyst Peter Salkowski

questioned defendants’ decision to draw down $247 million from their $250 million credit revolver

given the Company’s strong cash flow:

First of all, I’d just like to start with the revolver, if you could give an idea of whatyour reasoning was there to draw that down at this point. It seems like you have afair amount of cash at the end of the quarter and why you felt it was necessary todraw down the $247 million?

Jones responded:

With respect to the revolver, as we stated in the release, we drew it down for generalcorporate purposes. Given the current market environment and our current situationas well as the current status of the credit markets, maximizing liquidity and flexibilityby going ahead and drawing down that revolver we believe to be a prudent action.

120. Later in the October 30, 2008 call, another analyst – Joe Stein with Wells Fargo –

expressed concern about this decision:

I know that you were asked a question on the revolver before. I was just hoping Icould get a little bit more clarity. If you’re throwing off as much cash flow as you’rethrowing off, with the real rationale – and investment banks who are committed, theyare theoretically in good stead at this point and there’s no concern about them goingunder and limiting your liquidity in that fashion – what the rationale is for drawingdown your entire revolver at this point?

Jones provided little additional detail:

As we said in the release, we talked about the fact that we drew it down for generalcorporate purposes. There’s really not a lot more to say than what I responded towith respect to the last question around that in that maximizing liquidity andflexibility in this environment was in our view the prudent thing to do. And that’sbasically the extent of the draw-down.

121. During the October 30, 2008 conference call, Klein stated revenue was being

generated by both new and existing clients. Klein also admitted that Idearc had been extending

credit to customers that were not worthy of such credit:

As far as what we’re seeing on the market on a go-forward basis, our salesorganization on the one hand is quite energized by the revenue they’re creating withnew clients and increasing revenue from existing clients.

- 51 -506038_1


What is slowing us down is our clamping down on credit and making surethat we’re only selling clients that are actually 100% credit worthy. So as a result,we have meaningful amount of revenue that we have on our own decided to ineffect cancel out rather than take on the credit risk. So, there’s a balancing actgoing on between significant growth and at the same time meaningful revenue beingcanceled as a result of credit.

122. During the October 30, 2008 conference call, Jones also commented on the impact of

increased bad debt to the Company’s costs and its margins:

With respect to the cost changes in the quarter in a quarter-over-quarter basis, what Icited on two or three issues there. One being the bad debt and part of that’s theprovision rate and then part of that is the activities and initiatives on the collectionside and the investment we’re making there to ensure we’re fully collecting onactivities, so that is causing a cost impact.

* * *

[WJe are feeling more pressure on the margin side relative to the bad debt issueand the bad debt activities that we’re seeing. As I noted, the provision rate for thethird quarter was about 8.2% for bad debt. The year-to-date level is at 6.5% and so,we are seeing additional pressure on margins as we look out through the remainder ofthe year associated with that activity.

123. Upon these shocking revelations of the serious problems with Idearc’s business that

had been previously misrepresented or concealed, and the fact that defendants’ prior assurances that,

despite the problems, the core of Idearc’s business was stable, were false, more of the remaining

artificial inflation quickly came out of Idearc’s stock. The stock price fell sharply – dropping 3 6% –

on October 30, 2008 on huge and much higher than normal volume of nearly 8 million shares,

damaging earlier purchasers of Idearc’s stock during the Class Period.

124. Analysts were greatly disappointed by the disclosures made by defendants during

Idearc’s October 30, 2008 conference call and shocked by the draw down Idearc’s credit facility. On

that day, Wachovia issued an analyst report headlined: “IAR: 3Q EBITDA Miss – Exploring Capital

Structure Alternatives.” The report further stated:

IAR reported 3Q EBITDA of $302M, well below our/ Street expectations ($338M).

* * *

- 52 -506038_1


Despite having over $300M of cash on its balance sheet at quarter end, IARborrowed $247M under its $250M revolver, boosting its cash to almost $550M, andtaking advantage of all current available liquidity. Still, based on our estimates, weforecast the company will break its 7.25x net leverage covenant by mid-’09. . . .

IAR announced that it has retained Merrill Lynch and Moelis & Co. as financialadvisors to review its capital structure alternatives. While management would notcomment on what options the company is exploring, we note that we see fewpotential opportunities in the current financial / economic environment, particularlyfor a company with over 7x leverage and over $9B in debt.

125. On November 3, 2008, Deutsche Bank issued an analyst report covering Idearc,

noting: “We thought the company would do a better job controlling costs in the quarter as a way to

mitigate the fading top line.” The report also stated:

Consolidated (multi-product) net revenues came in at $735mm for the three monthperiod, a decline of 7.1% from 3Q07 (in-line with consensus expectations). Whilethis continued top line erosion was expected, rising costs (notably bad debt expense)during the quarter effectively wiped out any cost savings achieved, causing AdjustedEBITDA to drop 24.1% year-over-year to $302mm (well below consensusexpectations).

* * *

After the quarter close (on October 24th), IAR drew down $247mm on its$250mm revolver for “general corporate purposes.” Management did not provide adeeper explanation for this besides stating that it believed it was prudent for IAR tomaximize its liquidity and flexibility in this environment. Given that the companyhad plenty of liquidity on hand (-$304mm) and is set to generate cash for theforeseeable future, this move was unexpected.

POST-CLASS PERIOD EVENTS AND ADMISSIONS

126. Defendants were not able to bring Idearc into compliance with NYSE regulations. As

a result, at market close on November 20, 2008, Idearc Inc.’s common stock (trading symbol IAR)

stopped trading on the NYSE. The next day, November 21, 2008, Idearc announced its common

stock began trading OTC with the new symbol IDAR.

127. On March 12, 2009, Idearc announced its 4Q08 and FY08 financial results. Business

Wire, Inc. reported:

- 53 -506038_1


Idearc Inc. (OTC: IDAR) today announced financial results for the fourthquarter and year ended December 31, 2008.

“Idearc’s fourth quarter financial results are disappointing as we expected,”said Scott W. Klein, chief executive officer of Idearc Inc. “We are making progresson our transformational and cost-cutting initiatives. However, the unprecedentedeconomic challenges this nation is facing are creating never-before-seen obstacles forour clients and, as a result, for us as well.”

* * *

For the year ending December 31, 2008, Idearc reported multi-productrevenues of $2,973 million, a 6.8 percent decrease compared to the same period in2007. Annual Internet revenue was $300 million, a 5.3 percent increase compared tothe same period in 2007.

The Company reported fourth quarter 2008 multi-product revenues of $709million, a 9.9 percent decrease compared to the same period in 2007. The Companyreported Internet revenue of $77 million in the fourth quarter, a 2.7 percent increasecompared to the same period in 2007.

The Company reported 2008 earnings before interest, taxes, depreciation andamortization (EBITDA) of $1,004 million including impairment charges, a 29.8percent decrease compared to the same period in 2007. Reported 2008 EBITDAmargins were 33.8 percent including impairment charges, compared to 44.9 percentin the same period in 2007. On an adjusted basis, 2008 EBITDA was $1,272 million,a 16.2 percent decrease compared to the same period in 2007. Adjusted EBITDAmargins were 42.8 percent, compared to 47.6 percent in the same period in 2007.

* * *

As of December 31, 2008, Idearc had cash and cash equivalents of $510million. As previously reported, in October 2008, the Company borrowed $247million under its existing $250 million revolving credit facility.

* * *

“Simply stated, restructuring our capitalization and debt obligations to a moreappropriate level will provide us with the opportunity to prosper and grow in theyears ahead,” Klein said. “We are dedicated to implementing an appropriate capitalstructure to support our new strategic business plans and objectives. A debtrestructuring plan that will strengthen Idearc’s financial condition will positionthe Company to compete more effectively in a challenging and rapidly evolvingeconomic environment.”

“We would expect the Company to operate as usual throughout the restructuringprocess and continue to meet its obligations to consumers, clients and employees,just as we do now and have done in the past.”

- 54 -506038_1


128. Then on March 31, 2009, Idearc initiated voluntary Chapter 11 bankruptcy

proceedings. An article issued by Market News Publishing on that day reported:

Idearc Inc. announced that the Company and its domestic subsidiaries todayfiled voluntary petitions for reorganization under Chapter 11 of the U. S. BankruptcyCode in the U.S. Bankruptcy Court for the Northern District of Texas, DallasDivision. Idearc also announced that it has reached an agreement in principle withthe agent bank and a steering group of its secured lenders on certain critical elementsof a plan of reorganization. The Company expects to be able to file a plan ofreorganization in approximately 30 days, and if implemented as proposed, this planwill enable Idearc to significantly reduce its outstanding debt to a more suitable levelupon emergence from the legal proceedings. . . .

“Today we take an important step forward as we continue to transform Idearc.Essentially we have a company with good potential being held back by a terminallyill balance sheet,” said Scott W. Klein, chief executive officer of Idearc Inc. “We arenot only open for business and serving our clients as usual, we are also continuingour focus on transforming Idearc for the future based on a bold strategy, including allof the new programs launched earlier this month. “The reorganization process willenable Idearc to quickly finalize and implement a debt restructuring plan that willstrengthen our financial condition and position us to compete more effectively in achallenging and rapidly evolving economic environment,” Klein said. “One of ourmost important priorities is to put in place an appropriate capital structure to supportour strategic business plans and objectives. A new capital structure that can give allof our partners the confidence they need in us to be there for them in the years aheadprovides us with the greatest chance for success.” Under the agreement in principlewith the agent bank and steering committee, the Company’s total debt will bereduced from approximately $9 billion today to a pro forma level of $3 billion ofsecured bank debt, with a 12 percent interest rate and a six-year term. Mandatoryamortization will be $60 million for each of the first two years followingconfirmation and $40 million per year thereafter. The Company will retain 32.5percent of surplus cash flow, with the balance to be paid as additional amortizationon the bank debt. At emergence from Chapter 11, the Company will have a cashbalance of $150 million. Other terms of the plan are still to be negotiated, and it isanticipated that the remainder of the Company’s bank debt and bonds will beconverted to equity.

SCIENTER

129. As alleged in the following paragraphs, defendants had actual knowledge of the

falsity of the statements they made, or acted in reckless disregard of the truth or falsity of those

statements. In doing so, defendants participated in a scheme to defraud and committed acts,

- 55 -506038_1


practices and participated in a course of business that operated as a fraud or deceit on purchasers of

Idearc’s stock during the Class Period.

130. Defendants were Idearc’s top executive officers charged with not only developing

Idearc’s business strategy, but also overseeing the implementation and execution of that strategy

during the Class Period. Due to the circumstances described in this Complaint, nothing was more

important to defendants than making sure that Idearc appeared to be a viable concern, with a strong

cash flow and manageable debt levels. As such, they consequently monitored, as detailed below,

and knew, based on their review of such information, that their alleged Class Period

misrepresentations were false or misleading and omitted material information.

131. Harless, Coticchio, Jones and Gatto knew by at least February 2007 that Idearc’s bad

debt levels were rising and were going to continue to rise. Beginning in the fourth quarter of 2006

(“4Q06”), specifically October 2006 before the spin-off from Verizon was complete, Idearc began to

experience a sharp spike in the uncollected receivables that would need to be written off as bad debt

expenses. According to a former Idearc Area President (“CW1”), in conjunction with the spin-off of

Idearc from Verizon, Harless instructed Coticchio to cut his FY07 budget. As part of the budget

cuts, according to CW1, Coticchio eliminated the entire staff responsible for pursuing collection of

outstanding receivables due to Idearc. As a result, CW1 saw uncollectible receivables increase from

approximately 5% to approximately 9% of total revenues billed by CW 1’s region between February

2007 and July 2008, an increase also experienced by Idearc’s three other Area Presidents, including

defendant Gatto. According to CW1, by February 2007, uncollectible receivables amounted to $80-

$100 million companywide. By the end of June 2008, these receivables had climbed to between

$250-$270 million.

132. According to CW 1, Idearc deliberately did not pursue collections during all of 2007

and part of 2008. The decision to suspend these efforts happened between October 2006, as part of

- 56 -506038_1


the spin-off transition strategy, and February 2007. CW 1 sent four or five emails between February

2007 and June 2008 to Harless, Coticchio, Jones and the Head of the Credit Department Carol

Desmond Donahue, expressing concern about the significant rise in uncollected receivables in

CW 1’s region and urging that people and measures be put into place that would allow the Company

to identify non-paying customers more quickly, to resume collection efforts in earnest, and to get

customers on payment plans in order to successfully recoup overdue payments. However, no

measures were put into place. CW1’s emails also addressed the fact that the Company’s credit

policy was not being followed consistently, i.e., that Idearc was routinely extending credit to

customers without checking their credit histories, and that was also causing uncollected receivables

to increase.

133. The increase in uncollected receivables not only impacted Idearc’s income during

2007 and 2008, but also contributed to its ability to grow revenues going forward. According to

CW 1, the Company’s policy was that in order to sell a renewal or upsell to an existing customer for

the next book to be published, the customer had to either be current on its payments for ads/listings

in the existing book or delinquent by no more than 60 to 90 days. Because customer recognition of

Idearc’s name and the new separate yellow pages invoices was very poor after the spin-off (as

described in ¶¶136-137, 142-143), at renewal time Idearc discovered that many customers were

found to be delinquent and renewal sales could not be made because the outstanding payments could

not be resolved before the renewal cut-off date occurred.

134. CW 1 acknowledged, however, that new ad sales were made to existing customers

with delinquent accounts despite the Company’s official policy prohibiting it. CW 1 said this

occurred because “the systems couldn’t talk to each other.” Idearc used two different computer

systems, one for print sales and a separate one for Internet sales. CW1 identified the print sales

system as “VAST” and the Internet sales system as “Vision.” Because these two systems could not

- 57 -506038_1


share information with each other, a print account that showed up in VAST as delinquent did not

show up in the Vision Internet sales system as delinquent, and so new Internet sales could be made

to a customer who was delinquent in making print ad payments, and vice versa.

135. By 2008, customer collections became “a very big issue,” according to CW 1, because

by then it was crystal clear that uncollectible receivables was “an identifiable, growing issue.”

Though some temporary staff was brought in to focus on collections during the first half of 2008, the

Company’s systems were so inefficient that it was taking a lot of the sales staff’s time just to identify

which accounts were delinquent, in addition to sending out notices of delinquency and then seeking

payments from customers, in order to allow for new listing and advertising renewal sales to be made.

136. Another factor impacting the rising bad debt levels at Idearc was customer confusion

concerning the transition to Idearc’s direct billing of yellow pages fees. According to CW1,

beginning in December 2006, Idearc began to bill customers directly for yellow page customer fees

that had been previously billed by Verizon. Prior to the spin-off, yellow page customers were billed

for their listing and advertisements as a line item within their Verizon phone bills. In the years prior

to the spin-off, the sales force counseled their customers to never pay stand alone invoices because

of the high instance of billing fraud in the yellow page industry from fake providers. After the spin-

off, Idearc began to direct bill these customers, using invoices without any reference to Verizon, or

processing direct credit or bank card debits also without reference to Verizon. This caused a

tremendous amount of customer confusion, and consequently, customers, believing the

billings/debits to be bogus, simply did not pay the invoices or disputed the credit or bank card debits

believing them to be from a bogus provider. As a result, Idearc’s uncollected receivables increased

substantially.

137. According to CW 1, this customer confusion was a direct result of the handling of the

transition of the billing from Verizon to Idearc. The “transition team” was led by Coticchio, and the

- 58 -506038_1


head of the Credit Department, Carol Desmond Donahue, was also part of that transition team. The

effort to notify customers about the change in billing practices as a result of the spin-off consisted of

sending one or two letters to customers shortly after the spin-off to inform them about the new

billing practices and identify Idearc as the new provider handling their yellow pages accounts.

138. CW 1 is a former Idearc Area President. CW 1 held this position at Idearc and

predecessor companies, GTE and Verizon, from 2003 through July 2008. During CW1’s tenure at

Idearc, CW 1 attended the weekly executive meetings which typically took place on Monday

mornings at 9:00 am in the Executive Conference Room on the third floor of the headquarters office

in Dallas. This conference room was next door to Harless’s office, and across the hall from the

Board Room. These meetings usually lasted several hours, often times requiring lunch to be

delivered to the attendees. Sometimes these meetings lasted all day, were held twice a week, or were

held every other week. In addition to CW 1 and the other Area Presidents, Harless, Coticchio, Jones

and Gatto would attend these meetings, along with the Head of Human Resources, Head of Public

Relations, and sales executive Mike Pawlowski. Beginning in June 2008 when he joined Idearc,

Klein also attended these meetings.

139. According to CW 1, at the weekly executive meetings, CW 1 and the other participants

reviewed monthly and quarterly financial statements, prepared for investor conference calls, and

discussed Idearc’s rising uncollectible receivables and the appropriate reserve level that should be

booked. Indeed, during 2007, Harless and Coticchio had very contentious exchanges during these

meetings concerning the reason for the rising receivables and who was to blame for the situation.

CW 1 witnessed in the weekly meetings, Harless asking Coticchio why the uncollectible receivable

number was rising and Coticchio responding that it was because he had to lay off the people

handling collections because Harless demanded that he cut his budget. Harless, in turn, would

comment that it was Coticchio’s bad choice to cut that department to reduce his budget; to which

- 59 -506038_1


Coticchio would respond that Harless approved that decision when he proposed the cuts to her

earlier in 2007.

140. During the weekly meetings, the participants also reviewed in detail the sales results

from each region contained in the New, Increase, Decrease & Cancel Reports, or “NIDC Reports.”

According to CW 1, the figures in these reports were what Idearc executives “lived by.” The NIDC

Reports were prepared and distributed every two weeks, and cumulative quarterly and annual NIDC

Reports reflecting cumulative data for these time periods were also prepared and reviewed in the

meetings that occurred around quarter-end and year-end, respectively. However, the reports were

highly customizable, and so reports could be generated covering a single pay period, and reflecting

region-by-region, state-by-state, city-by-city, and even book-by-book (meaning individual Yellow

Pages directories for particular areas within a city). The NIDC Reports contained five separate data

categories on sales revenues, including: (1) revenues generated from new customer accounts; (2)

existing customer accounts that generated increased revenues from the prior period; (3) existing

customer accounts that generated revenues for the period but that decreased from the prior period;

(4) existing accounts that canceled their accounts or orders during the period covered by the report;

and (5) the “Book Net,” which represented the cumulative net revenues for the period covered by the

report from the New, Increase, Decrease, and Cancel segments of the report.

141. CW1 reports that the NIDC Reports discussed in the weekly executive meetings

showed increasing revenue losses during 2007, particularly in the California, Arizona and Florida

regions hit hardest by the housing decline. According to CW 1, during 2006 much of the revenue

gains Idearc enjoyed came from advertisements and listings for customers offering housing-related

products and services, such as general contractors, garage door opener installation, locksmiths,

remodeling contractors, among others. As a result of the housing crisis that began in 2007, these

types of accounts declined very significantly in 2007.

- 60 -506038_1


142. Idearc’s former Director of Training (“CW2”), confirms that after the spin-off and

during the billing transition, customer confusion caused uncollected receivables to dramatically

increase. Like CW1, CW2 attributes this increase to customers not recognizing the Idearc name as

their new yellow page account service provider. CW2 was Idearc’s Director of Training from

January 2006 until leaving Idearc in 2008. CW2’s job was to train the sales staff and communicate

Company policy changes to the sales staff. CW2 worked in Idearc’s Dallas headquarters. CW2

attended monthly meetings with each of the Area Presidents and their management teams, including

CW1, during the Class Period. During these meetings, the participants would discuss the events or

factors effecting the particular region, including financial performance of the regions and training

support needed from CW2’s department.

143. “CW3,” a former Idearc Sales Consultant, also confirms that after the spin-off,

customers were not adequately informed of the switch from Verizon to Idearc. CW3 worked as an

Idearc Sales Consultant in the Dallas-area between September 2006 and June 2007. CW3’s duties

included interacting with customers, making cold sales calls and fielding customer questions

concerning their accounts. CW3 fielded many calls from frustrated customers looking for an

explanation for their receipt of an invoice from Idearc, or disputing a credit or bank card debit. CW3

was not permitted to give the customers information about the spin-off, or the new billing

procedures, and as a result customers cancelled their accounts and disputed the charges.

144. Contributing to Idearc’s increasing bad debt levels, were the extreme relaxation of

credit policies during the Class Period. According to CW2, Harless, Coticchio, Gatto and Jones

participated in the decisions to alter the credit policies during the Class Period. CW2’s department

was responsible for communicating these changes to the sales staff and drafted memoranda, or

“Sales Bulletins”, describing the changed policies. Prior to distribution to the sales staff, CW2’s

- 61 -506038_1


department, in conjunction with Idearc’s legal department, would submit the Sales Bulletins to

Harless and the other upper management team members for review and comment.

145. According to former Idearc Sales Manager in the Dallas area (“CW4”), during the

Class Period, the Company modified the requirements for when a credit check was required. Prior to

the Class Period, Idearc required a credit check on all accounts generating more than $450 in fees.

During the course of the Class Period, this minimum credit threshold increased almost 100% to

$850. According to CW4, even when a credit check was required, the Company did not run detailed

credit checks through credit reporting agencies such as TRW. Instead, personnel in Idearc’s Credit

Department simply entered the tax identification number of the individual or business into its VCAN

computer system. VCAN would then assign a dollar figure equal to the monthly dollar amount the

sales representative was permitted to sell to that customer. Part of CW4’s job responsibilities

included initiating credit checks, when required, through Idearc’s Credit Department.

146. Idearc also improperly recognized revenue on pay-per-click on line ad sales known as

“PBAP.” According to CW4, a PBAP sale entailed the customer agreeing to pay up to a specific

maximum “spend limit” per month for the total number of clicks its ad received, based upon an

agreed upon dollar amount per click. However, instead of recognizing the revenue associated with

the actual number of clicks the customer was billed for, the maximum spend limit was entered into

the Vision system as the total sale amount and recognized as revenue by the Company. In CW4’s

experience, the actual number of clicks a PBAP sale would generate were vastly lower – as much as

90% – on virtually every PBAP sale CW4 was familiar with. CW4, as with all other sales

representative personnel, received commissions at the end of each pay period on the sales made and

recorded as revenue by the Company. CW4 received commissions on the maximum spend limit for

each PBAP sale made.

- 62 -506038_1


147. Idearc also improperly recognized revenue on print ad sales. According to CW4,

sales of directory listings and ad space in Idearc’s print publications occurred at least one quarter,

and as much as one year, before publication of the book. These sales efforts were known internally

as “campaigns” and the length of the campaign varied depending on the size of the book and the

geographic area it served. Idearc recognized the revenue on these campaigns at the time of the sales,

not at the time of the publication of the books. CW4, as with all other sales representative personnel,

received commissions at the end of each pay period on the sales made and recorded as revenue

during that period. CW4 reported that the commissions associated with CW4’s print sales were paid

to him during the pay period in which the sale was made.

148. Knowing that the bad debt levels were rising as described by CW1, Harless and

Coticchio took affirmative measures to alter Idearc’s books to reflect a lower level of bad debt

receivables. According to a source who had face to face conversations with Chief Executive

Accounting Officer Dane Beck (“Beck”) during the Class Period and the timeframe immediately

proceeding it (“CW5”), beginning in April 2007, Harless and Coticchio instructed Beck to “alter

accounts receivable and doubtful accounts to look like Verizon.” According to CW5, Beck said that

this meant he was asked to move doubtful accounts into accounts receivable so that they appeared

collectible on Idearc’s financial statements. On that particular day in April 2007, Beck informed

CW5 that he moved $3 million of doubtful accounts to accounts receivable.

Executive Compensation

149. Defendants’ personal wealth was also directly tied to Idearc’s financial performance.

A large portion of defendants’ compensation packages were dependent upon Idearc posting

favorable financial results. Pursuant to Idearc’s March 14, 2008 Proxy Statement, the Company’s

“Compensation Philosophy and Objectives” stated as follows:

In making decisions with respect to compensation for executive officers, the[human resources] committee [of the board] is guided by a pay-for-performance

- 63 -506038_1


philosophy. The committee believes a significant portion of each executive’s totalcompensation opportunity should be tied to and vary with achievement of thecompany’s financial, operational and strategic goals. In designing thecompensation program for executive officers, the committee seeks to achieve thefollowing key objectives:

• Attract and Retain Talented Executives. The compensation program shouldprovide each executive officer with a total compensation opportunity that ismarket competitive. This objective is intended to ensure that the company isnot at a competitive disadvantage in attracting and retaining executives whilemaintaining an appropriate cost structure for the company.

• Motivate Executives. The compensation program should encourage theexecutive officers to achieve the company’s goals.

• Alignment with Stockholders. The compensation program should alignexecutives’ interests with those of our stockholders, promoting actions thatwill have a long-term positive impact on total stockholder return.

• Compensation Should Be Transparent. The elements of the compensationprogram should be easily understood by both our executives and ourstockholders.

These objectives remained consistent with the objectives outlined in Idearc’s 2007 Proxy Statement.

150. In its March 14, 2008 Proxy Statement, Idearc also disclosed 2007 compensation

information for certain defendants. As to base salary: Harless earned $650,000 (a 35% increase from

2006); Jones earned $197,000 (a 4% increase from 2006); Gatto earned $307,400 (a 13% increase

from 2006); and Coticchio earned $425,000 (a 38% increase from 2006).

151. The “Short-Term Incentive Compensation” guidelines were also set forth in Idearc’s

March 14, 2008 Proxy Statement:

In the first quarter of 2007, the committee recommended to the board forapproval and the board approved target awards under the short term incentive planfor each executive officer. The target awards were set at a percentage of base salary.Later in the first quarter of 2007, the committee approved the remaining terms of theawards.

• Operating Income Before Interest, Taxes, Depreciation and Amortization(OIBITDA). The committee selected this metric because it provides ameasure of the company’s performance and ability to service debt, paydividends and reinvest in growth initiatives. The committee also believedOIBITDA to be a strong indicator of the company’s cash flow. The

- 64 -506038_1


committee believed this metric to be important given the company’s level ofindebtedness following the spin-off. OIBITDA is a non-GAAP measure.The committee calculated OIBITDA by adding GAAP depreciation andamortization to GAAP operating income.

* * *

• Print Published Revenue. The committee selected this metric because it isuseful for evaluating the company’s performance in its print business,which is the company’s largest and most profitable business. Printpublished revenue represents the total revenue value of directories publishedthat will be amortized over the life of the directories, which is typically 12months.

• Internet Revenue. The committee selected this metric because it is useful forevaluating the company’s performance in its Internet business, which thecommittee considers a growth engine for the company and important to thelong-term success of the company.

The committee set minimum, target and maximum levels of performance foreach metric. The company’s performance against each of these metrics wasweighted to provide an overall, percentage-based measure of performance. Thecommittee decided the performance metrics should be weighted 50% for OIBITDAand 50% for the revenue metrics to balance the company’s focus on revenuegrowth and cash flows to service debt and other initiatives. For the revenue metrics,the committee allocated more weight, 35%, to print published revenue, compared to15% for Internet revenue, because of the significant portion of the company’s overallrevenue and profit represented by the print business.

152. Based on certain defendants’ “2007 performances,” short term incentive

compensation based on these metrics was as follows: Harless – 86.1% of base salary or $559,650;

Jones – 49.7% of base salary or $97,909; Gatto – 61.2% of base salary or $188,128; and Coticchio –

80% of base salary or $340,000.

153. Furthermore, Idearc’s March 14, 2008 Proxy statement set forth the following

information regarding “Long-Term Equity-Based Compensation”:

The [human resources] committee believes generally that equity awardsshould provide a payout only if long-term performance goals are achieved.Consistent with this objective, the committee determined that the company’s totalstockholder return should be used as the performance metric for long-termincentive awards granted in 2007. Total stockholder return (“TSR”) is a non-GAAPmeasure and is based on the change in the company’s closing stock price on the firstand last trading days of a three-year performance period. The calculation of TSR

- 65 -506038_1


will include the assumed reinvestment of any dividends paid during the performanceperiod.

154. Idearc also disclosed compensation information pertaining to certain defendants in its

FY08 10-KA. As to base salary, for the year 2008 Klein earned $1,000,000; Jones earned $325,000

(an increase from $240,000 in 2007); and Gatto earned $385,000 (an increase from $307,000 in

2007). In addition to their base salaries, Klein received 50% of his salary ($500,000); Jones received

28.4% of his salary ($92,300), and Gatto received 28.4% of his salary ($109,300) in the form of

short-term incentive awards based on the Company’s 2008 performance. However, under the terms

of his employment agreement, Klein was entitled to a minimum short-term incentive payout for 2008

of $500,000, regardless of the level achievement of these performance metrics and goals.

IDEARC’S FALSE FINANCIALREPORTING DURING THE CLASS PERIOD

155. In order to inflate the price of Idearc’s stock, defendants caused the Company to

falsify its financial results reported in its public financial statements for second and third quarters of

fiscal 2007, for fiscal year-end December 31, 2007, for the first two quarters of fiscal 2008 and for

the earnings release for the third quarter of fiscal year 2008 2 by failing to properly account for its

allowance for doubtful accounts receivable, bad debt expense and improperly inflating revenues and

accounts receivable in violation of Generally Accepted Accounting Principles (“GAAP”). 3 These

2 The Company filed its earnings release with the SEC as an exhibit to the Form 8-K for thethird quarter of 2008 filed on October 30, 2008, the last day of the Class Period. The earningsrelease included a consolidated income statement for the three and nine months ended September 30,2008, a consolidated balance sheet as of September 30, 2008 and a consolidated statement of cashflows for the nine months ended September 30, 2008. The numbers reported in these financialstatements were identical to the numbers reported when the Form 10-Q for the third quarter of fiscalyear 2008 was filed with the SEC on November 6, 2008. As a result, the public financial statementsfor the third quarter of fiscal year 2008 were distributed publicly on October 30, 2008.

3 GAAP are those principles recognized by the accounting profession as the conventions, rulesand procedures necessary to define accepted accounting practice at a particular time. SEC

- 66 -506038_1


GAAP violations resulted in the overstatement of the Company’s revenues, assets, net income and

EPS.

156. Idearc’s Class Period financial statements were included in its Form 10-Ks and Form

10-Qs filed with the SEC for second and third quarters of fiscal 2007, for fiscal year-end

December 31, 2007, for the first two quarters of fiscal 2008 and for the Form 8-K filed on October

30, 2008 which included public financial statements as part of the earnings release for the third

quarter of fiscal 2008. Defendants’ Form 10-Ks and Form 10-Qs filed with the SEC specifically

stated that the financial statements were prepared in accordance with GAAP.

157. Defendants’ representations were false and misleading as to the financial information

reported, as such financial statements were not prepared in accordance with GAAP for the reasons

discussed in more detail below.

158. The Company’s financial statements violated GAAP and SEC rules by improperly

accounting for the following in its financial statements:

• Improper Revenue Recognition – Idearc improperly recognized revenues ina number of different manners. First, the Company violated its own revenuerecognition accounting policy as disclosed in its Form 10-Qs and Form 10-Ksfiled with the SEC by improperly recognizing certain print advertisingrevenues at least one quarter earlier than when the revenue should have beenproperly recorded. Second, the Company improperly recognized certaininternet advertising revenues from its pay-per-click online advertising salesknown as PBAP. Third, Idearc recognized revenues on fake customeraccounts, claiming that the sales had legitimately been made to actualcustomers. Finally, the Company improperly recognized revenue on sales tocustomers whom defendants knew, or recklessly disregarded, were unable or

Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC whichare not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despitefootnote or other disclosure. Regulation S-X requires that interim financial statements must alsocomply with GAAP, with the exception that interim financial statements need not include disclosurewhich would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R.§210.10-01(a).

- 67 -506038_1


unlikely to pay because the customer was already seriously delinquent inpaying for prior sales or had never paid for its previous advertisements.

• Failure to establish an adequate allowance for doubtful accountsreceivable and record bad debt expense - Idearc failed to properly providean adequate allowance for doubtful accounts receivable and record anadequate bad debt expense for a significant volume of customers that it knewlacked creditworthiness and an inability to pay or for accounts receivable itknew were likely uncollectible.

• Overvaluation of accounts receivable - Idearc overvalued its accountsreceivable by including accounts receivable for which revenues wereimproperly recorded for the reasons discussed above, and for certaindelinquent customers where collection was never probable or reasonablyassured.

Idearc’s Improper Revenue Recognition

159. In order to artificially inflate the price of Idearc’s stock throughout the Class Period,

defendants improperly recognized revenue on advertising sales to purported customers where the

customer’s phone number listed in its yellow pages advertisement was not legitimate, or did not

actually exist, had been disconnected, or constituted a pre-paid cell phone number that the

Company’s sales representatives had obtained for the purpose of improperly recording fake sales.

Defendants further improperly inflated revenues by recording significant sales to customers who

defendants knew were unable to pay because the customer was already seriously delinquent or had

never paid for past sales, yet new billings and sales to the same customer were recorded, as detailed

in ¶¶132-134, 145.

160. Defendants improperly recognized revenues by recording certain print advertising

revenues in the Company’s financial statements at least one quarter earlier than when the revenues

should have been properly recorded. As disclosed in Idearc’s Form 10-Qs and Form 10-Ks, the

Company’s revenue recognition policy was to recognize revenue from its print sale advertisements

ratably over the life of each directory with revenue recognition commencing in the month of

publication. However, as discussed at ¶147, certain revenues from print advertisement sales were

- 68 -506038_1


prematurely recorded as revenues in the financial statements in one quarter, however, the actual

advertisements for that customer were not published until one, two, three, or even sometimes four

quarters after the sale occurred and the revenue had already been recognized improperly.

Recognizing revenues in the financial statements at the time of the sale rather than waiting to

recognize the revenues properly at the time the actual advertisement for that customer was published,

allowed defendants to falsely recognize revenues before the revenue had officially been earned.

161. Defendants also improperly recognized revenues related to its pay-per-click online

advertising sales known as PBAP. As detailed in ¶146, the Company improperly recorded the

maximum “spend limit” per month as revenue, even though the only revenue the Company was

entitled to under GAAP should have been based on the number of actual clicks received on its

website, which was substantially lower than the maximum “spend limit.”

162. GAAP and SEC rules clearly were violated by allowing revenue to be recognized in

such cases. SEC Staff Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition, 4 §A1 sets

forth several criteria that must all be met before revenue may be recognized, including that

collectability of the sales price must be reasonably assured, services must have been rendered and

persuasive evidence of an arrangement between the Company and the customer must exist:

The staff believes that revenue generally is realized or realizable and earned when allof the following criteria are met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The seller’s price to the buyer is fixed or determinable; and

4 SAB Topic 13 represents the codification of certain Staff Accounting Bulletins, includingSAB No. 101, Revenue Recognition in Financial Statements as of May 9, 2003. On December 17,2003, SAB Topic 13 was revised by SAB No. 104, Revenue Recognition. Such revisions, have beenincorporated in all references to SAB Topic 13.

- 69 -506038_1


a Collectability is reasonably assured.

SAB Topic 13, §A1.

163. Clearly, the Company did not meet the SEC criteria for properly recording revenue in

its financial statements, as each one of the Company’s improper revenue schemes violated at least

one or more of the four basic criteria of SAB Topic 13, Revenue Recognition listed above. 5

No Persuasive Evidence of an Arrangement with a Customer

164. The first SEC criteria, that persuasive evidence of an arrangement with a customer

must exist, was clearly not met for revenues Idearc recorded on advertising sales to purported

customers where the customer’s phone number listed in its yellow-pages advertisement was not

legitimate, did not actually exist or had been disconnected. It goes without saying that if a customer

is illegitimate or does not exist, no credible arrangement can exist. Similarly, persuasive evidence of

an arrangement was not established for Idearc’s revenues where the Company’s sales

representatives had purchased pre-paid cell phones and used these phone numbers to create fake

customer accounts. Accordingly, revenues from these “fake” or illegitimate sales should not have

been recognized during the Class Period.

Services Had Not Been Rendered

165. Idearc also violated the second SEC criteria established by SAB Topic 13, that

“services [must] have been rendered” before revenue can be recognized. For example, in Idearc’s

pay per click online advertising sales known as PBAP, the Company recorded the customer’s

maximum spend limit as revenue even though it was only entitled to record the revenues that were

the result of the actual number of clicks that occurred on the Company’s website, which was

5 It should be noted that if a Company violates any one of the four basic criteria for properrevenue recognition as established in SAB Topic 13, the Company is unable to recognize thatrevenue until all four points of the basic criteria have been met.

- 70 -506038_1


typically significantly lower than the maximum spend limit. By the Company recording revenues in

excess of the actual number of clicks that occurred on the Company’s website, defendants violated

SAB Topic 13 revenue recognition rules since the services had not been rendered for the revenues

recorded in excess of the actual clicks.

166. Similarly, Idearc violated the second criteria that “ services [must] have been

rendered” when it improperly recognized revenue at the time the customer was signed up, rather

than waiting until the actual advertisement for that customer was published. This was a violation of

the revenue recognition rules because the Company was not entitled to properly record that revenue

until the actual advertisement for that customer was published providing evidence to the Company

that the “services had been rendered” and the revenue had been earned.

Collectability Not Reasonably Assured

167. Idearc also violated the fourth SEC criteria, that revenue cannot be recognized unless

“collectability is reasonably assured.” For example, as alleged above, Idearc improperly recorded

revenue on illegitimate, questionable, non-existent or fake customers. The collectability from such

customers was highly unlikely given the nature of these “fake” sales.

168. Similarly, collectability was also not reasonably assured where Idearc improperly

recognized revenue for sales made to customers who defendants knew were unable or unlikely to

pay because the customer was already seriously delinquent in paying for past sales. For example,

the Company used separate sales systems for the print and internet sales, respectively, as further

described in ¶134. Because these two systems did not share information with each other, a print

account for a specific customer that showed up in the system as delinquent would not show up on the

Internet sales system as delinquent, and vice versa. Idearc took advantage of this by ignoring the

delinquency in one system, and making new sales to the delinquent customer in the other system.

Defendants were well aware that the two systems could not share information with each other ( id.),

- 71 -506038_1


yet they failed to fix the problem. The recognition of these new revenues was inappropriate because

collectability was not reasonably assured for the new sales made to the customer since the customer

was already seriously delinquent from the prior sales made.

169. By ignoring the basic revenue recognition rules of SAB Topic 13 above, Idearc

improperly and materially inflated revenues, which falsified its reported net income, EPS and

financial position reported in its public financial statements for the second and third quarters of fiscal

2007, for fiscal year-end December 31, 2007, for the first two quarters of fiscal 2008, and for the

earnings release for the third quarter of fiscal 2008, in violation of GAAP and SEC Rules.

Idearc’s Improper Accounting for its Accounts Receivables,Bad Debt Expense and Allowance for Doubtful Accounts

170. Idearc’s balance sheet included in its public financial statements included accounts

receivable that arose from credit sales of print directory advertising as well as the sale of advertising

on its Internet websites. In connection with these accounts receivable, GAAP required that Idearc

establish an adequate allowance for doubtful accounts, i.e., a reserve for the estimated amount of

accounts receivable that the Company deemed to be uncollectible. However, Idearc improperly

failed to do this.

171. While the Company’s accounts receivable as stated on its balance sheet within its

financial statements was recorded net of an allowance for doubtful accounts receivable, defendants

knew or were reckless in not knowing that the allowance was materially insufficient. GAAP

requires that, as Idearc determined specific customer’s accounts receivable were uncollectible, the

Company was required by GAAP to recognize bad debt expense on its income statement in the

current period (thereby reducing earnings on its income statement) and increase the “reserve” or

“allowance for doubtful accounts receivable” in the current period (thereby reducing its accounts

receivable on its balance sheet). Such “reserves” are required by Statement of Financial Accounting

(“SFAS”) No. 5, Accounting for Contingencies. SFAS No. 5 , ¶8 states the following:- 72 -

506038_1


An estimated loss from a loss contingency [ e.g., collectability of accounts receivable]shall be accrued by a charge to income if both of the following conditions are met:(a) Information available prior to issuance of the financial statements indicates that itis probable that an asset had been impaired or a liability had been incurred at the dateof the financial statements. . . . (b) The amount of loss can be reasonable estimated.

172. Similarly, GAAP requires “[a]n expense or loss [to be] recognized if it becomes

evident that previously recognized future economic benefits of an asset have been reduced or

eliminated.” See FASB Concepts Statements (“FASCON”) No. 5 ¶87. Idearc’s financial statements

filed on Form 10-Ks and 10-Qs with the SEC violated these basic rules of accounting which require

doubtful accounts receivable to be adequately reserved for, and uncollectible accounts receivable to

be written-off as charges to earnings in the applicable reporting period.

173. Idearc failed to properly reserve for and write off uncollectible accounts receivable in

violation of GAAP and SEC rules. In fact, during the Class Period Idearc knowingly implemented

policies that would significantly increase the level of bad debt, and the need for increased reserves.

For example,

• In order to reduce costs and balance the budget, defendants made a deliberatedecision prior to the Class Period to eliminate the Company’s collectionsstaff and to stop pursuing collections of accounts receivable, as more fullydescribed in ¶¶131-132, 135, 139-141.

• The Company relaxed its credit and collections policies and began makingsales to less creditworthy customers, as described in ¶¶132-134, 144-145.Defendants were routinely extending credit to customers without thoroughlychecking their credit histories and during the Class Period, relaxedsubstantially the requirements for when a credit check was required.

• The Company improperly inflated accounts receivable by recording saleswhich advertised a customer’s phone number listed in the yellow pages thatdid not actually exist, had been disconnected or went to a pre-paid cell phonenumber that the Company’s sales representative had obtained.

• The Company improperly inflated accounts receivable by recordingsignificant sales to customers who defendants knew were unable or unlikelyto pay because the customer was seriously delinquent in paying for past sales,yet new sales to the same customer were made, as described in ¶¶132-134.

- 73 -506038_1


174. Defendants knew, or were reckless in not knowing, that relaxing its credit policies to

avoid credit checks, and eliminating the collection department would materially increase the volume

and dollar amount of uncollectible accounts receivable and bad debts. Defendants also knew, or

were reckless in not knowing, that recording new revenue to previous nonpaying or delinquent

customers, or purported customers with illegitimate or cancelled phone numbers, would drastically

increase the amount of bad debt and uncollectible accounts. As described in ¶¶131-132, the

Company-wide increase in uncollected receivables between February 2007 and July 2008 was

around 3% to 4%. In dollar figures, the uncollected receivables amounted to an $80 million to $100

million issue for Idearc by February 2007, yet by mid-2008, uncollected accounts receivables nearly

tripled to roughly a $250 million to $270 million issue as a result of the accounting shenanigans and

questionable collection staffing described herein.

175. As a result of improperly failing to record bad debt and provide adequate reserves for

uncollectible accounts receivable, the Company materially understated expenses and overstated net

income and EPS as reported in its public financial statements filed with the SEC for the second and

third quarters of fiscal 2007, for fiscal year-end December 31, 2007, for the first two quarters of

fiscal 2008 and for the earnings release for the third quarter of fiscal year 2008 in violation of GAAP

and SEC rules.

Idearc’s GAAP Violations Were Material

176. Idearc’s improper accounting for revenues, accounts receivable, and bad debt expense

included in its Q2, Q3, and year-end 2007 and Q1, Q2, and Q3 2008 public financial statements filed

with the SEC was material, particularly in light of SEC guidance on materiality. SEC Staff

- 74 -506038_1


Accounting Bulletin (“SAB”) Topic 1 M, Materiality, summarizes GAAP definitions of materiality. 6

Among other items, SAB Topic 1M says: “A matter is ‘material’ if there is a substantial likelihood

that a reasonable person would consider it important.” A determination of materiality requires “full

analysis of all relevant considerations” because materiality “cannot be reduced to a numerical

formula.” Id. SAB Topic 1M stresses that materiality requires qualitative, as well as quantitative,

considerations. For example, if a known misstatement would cause a significant market reaction,

that reaction should be taken into account in determining the materiality of the misstatement.

177. Investors would have considered Idearc’s false financial statements and GAAP

violations that occurred during the Class Period material, given the unfavorable impact these

accounting improprieties had on misstating the Company’s net income, EPS, and financial position

as reported in its financial statements filed with the SEC. Furthermore, as evidenced by the

conference calls, analysts and investors were very concerned about the adequacy of the Company’s

allowance for doubtful accounts receivable and the proper recognition of its bad debt expense given

the high debt levels the Company took on through the Verizon spin-off. The understatement of the

Company’s allowance for doubtful accounts receivable and the understatement of its bad debt

expense would have been a material fact that analysts and investors would have considered very

important.

Idearc’s Financial Statements Violated Fundamental Concepts of GAAP

178. Due to these accounting improprieties, and in addition to the above referenced GAAP

violations, the Company presented its financial results and statements in a manner which violated

GAAP, including the following fundamental accounting principles:

6 SAB Topic 1 M, Materiality, represents the codification of certain Staff Accounting Bulletins,including SAB No. 99, Materiality, as of May 9, 2003. SAB No. 99 was effective August 12, 1999.

- 75 -506038_1


(a) The principle that interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial statements was violated.

(Accounting Principles Board (“APB”) No. 28, ¶10);

(b) The principle that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credit

and similar decisions was violated. (FASB Statement of Concepts (“FASCON”) No. 1, ¶34);

(c) The principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and effects of transactions, events

and circumstances that change resources and claims to those resources was violated. (M., ¶40);

(d) The principle that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it was violated. To the extent that management offers

securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general. (M., ¶50);

(e) The principle that financial reporting should provide information about an

enterprise’s financial performance during a period was violated. Investors and creditors often use

information about the past to help in assessing the prospects of an enterprise. Thus, although

investment and credit decisions reflect investors’ expectations about future enterprise performance,

those expectations are commonly based at least partly on evaluations of past enterprise performance.

(M., ¶42);

(f) The principle that financial reporting should be reliable in that it represents

what it purports to represent was violated. That information should be reliable, as well as relevant, is

a notion that is central to accounting. (M., ¶¶58-59);

- 76 -506038_1


(g) The principle of completeness, which means that nothing, is left out of the

information that may be necessary to insure that it validly represents underlying events and

conditions, was violated. (Id., ¶79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considered

was violated. The best way to avoid injury to investors is to try to ensure that what is reported

represents what it purports to represent. (Id., ¶¶95, 97).

179. Further, the undisclosed adverse information concealed by defendants during the

Class Period is the type of information which, because of SEC regulations, regulations of the

national stock exchanges and customary business practice, is expected by investors and securities

analysts to be disclosed and is known by corporate officials and their legal and financial advisors to

be the type of information which is expected to be and must be disclosed.

Defendants Certified False and Misleading Financial Results

180. The SEC requires that in the Form 10-Ks and Form 10-Qs, a Company’s CEO and

CFO sign certifications pursuant to §302 and §906 of the Sarbanes-Oxley Act of 2002. As discussed

in detail in ¶¶155-179, Idearc’s financial statements filed on Form 10-Qs and 10-Ks with the SEC

were not prepared in accordance with GAAP and SEC rules, yet defendants knowingly certified the

false and misleading financial statements despite this knowledge.

181. Section 302 of the Sarbanes-Oxley Act and SEC Rules 13a-14(a) and 15d-14(a) of the

Exchange Act required Harless, Gatto and Klein as CEO and Coticchio and Jones as CFO to certify

to the SEC and investors both the fairness and accuracy of the financial information in each quarterly

and annual report. Harless, Coticchio, Gatto, Klein and Jones were required to certify that the

financial statements and other financial information included in the reports were fairly presented in

all material respects. Harless, Coticchio, Gatto, Klein and Jones were required to certify that the

- 77 -506038_1


reports did not contain any untrue statement of material fact or omit to state a material fact.

Additionally, Harless, Coticchio, Garro, Klein, and Jones were required to certify that Idearc had

adequately designed internal controls over financial reporting in order to provide assurance

regarding the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with GAAP.

182. Harless, Coticchio, Gatto, Klein and Jones made these certifications when they knew

or recklessly disregarded that the financial statements were not prepared in accordance with GAAP

and the design of internal controls over financial reporting were inadequate. Similarly, in

accordance with §906 of the Sarbanes-Oxley Act and 18 U.S.C. §1350, Harless, Coticchio, Gatto,

Klein and Jones were required to certify each periodic report that included financial statements.

Their signed certifications falsely stated that: (i) the report fully complied with the requirements of

§13(a) or §15(d) of the Exchange Act; and (ii) the information contained in the report fairly

presented, in all material respects, the financial condition and results of operations of Idearc.

183. Harless, Coticchio, Gatto, Klein and Jones knowingly certified the following false

and misleading financial statements during the Class Period:

SCHEDULE OF CERTIFIED FINANCIAL STATEMENTS Financial Statement Filing Filing Signed/Certified byFiled on Form Period Date CEO CFO Form 10-Q 6/30/07 08/10/07 Harless CoticchioForm 10-Q 9/30/07 11/05/07 Harless CoticchioForm 10-K 12/31/07 02/29/08 Gatto JonesForm 10-Q 3/31/08 05/08/08 Gatto JonesForm 10-Q 6/30/08 08/11/08 Klein Jones

184. On the dates noted in the Schedule of Certified Financial Statements in ¶183 above,

Harless, Coticchio, Gatto, Klein and Jones signed and filed with the SEC certifications under SEC

Rules 13a-14(a)/15d-14(a) of the Exchange Act, §302 and §906 of the Sarbanes-Oxley Act attesting

to the accuracy and truthfulness of the corresponding Form 10-Ks and 10-Qs for Idearc. At the time

- 78 -506038_1


Harless, Coticchio, Gatto, Klein and Jones signed these certifications, they knew or recklessly

disregarded that they were false for the all the reasons alleged in ¶¶130-148.

Idearc Failed to Make Required Disclosures

185. The SEC requires that registrants include a management’s discussion and analysis

section, in annual and interim financial statements filed with the SEC. This section should provide

information with respect to the results of operations and “also shall provide such other information

that the registrant believes to be necessary to an understanding of its financial condition, changes in

financial condition and results of operations.” See Regulation S-K, 17 C.F.R. §229.303. Regulation

S-K states that the management’s discussion and analysis section for annual results shall:

(i) Describe any unusual or infrequent events or transactions or any significanteconomic changes that materially affected the amount of reported income fromcontinuing operations and, in each case, indicate the extent to which income was soaffected. In addition, describe any other significant components of revenues orexpenses that, in the registrant’s judgment, should be described in order tounderstand the registrant’s results of operations.

(ii) Describe any known trends or uncertainties that have had or that the registrantreasonably expects will have a material favorable or unfavorable impact on net salesor revenues or income from continuing operations. If the registrant knows of eventsthat will cause a material change in the relationship between costs and revenues(such as known future increases in costs of labor or materials or price increases orinventory adjustments), the change in the relationship shall be disclosed.

17 C.F.R. §229.303(a)(3).

186. The SEC also requires that interim period financial statements filed with the SEC

include a management’s discussion and analysis of the financial condition and results of operations

that enables the reader to assess material changes in financial condition and results of operations.

Regulation S-K, 17 C.F.R. §229.303(b), states that “[t]he discussion and analysis shall include a

discussion of material changes in those items specifically listed in paragraph (a) of this Item, except

that the impact of inflation and changing prices on operations for interim periods need not be

addressed.”

- 79 -506038_1


187. In violation of GAAP and SEC rules, Idearc’s financial results included in the

financial statements filed on Form 10-Ks and Form 10-Qs during the Class Period failed to properly

disclose its accounting policies related to its improper revenue recognition, overvaluation of

accounts receivable, the understatement of its allowance for doubtful accounts receivable and the

understatement of its bad debt expense. Despite the SEC requirements, defendants failed to disclose

the known trends and uncertainties (see ¶¶131-148) that investors would have considered material

given the unfavorable impact these known trends and uncertainties had on misstating the Company’s

net income, EPS, and financial position reported in its financial statements filed with the SEC.

NO SAFE HARBOR

188. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

Many of the specific statements pleaded herein were not “forward-looking statements.” To the

extent there were any forward-looking statements, they were not identified as such nor was there

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements given to investors.

Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking

statements pleaded herein, defendants are liable for those false forward-looking statements because

at the time each of those forward-looking statements was made, the particular speaker knew that the

particular forward-looking statement was false, or the forward-looking statement was authorized or

approved by an executive officer of Idearc who knew that those statements were false when made.

FRAUD-ON-THE-MARKET PRESUMPTION

189. Plaintiff will rely upon the presumption of reliance established by the fraud-on-the-

market doctrine. This presumption provides, inter alia:

- 80 -506038_1


(a) Defendants made public misrepresentations or failed to disclose material facts

during the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s securities traded in efficient markets;

(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s securities; and

(e) Plaintiff and other members of the Class purchased Idearc securities between

the time defendants misrepresented or failed to disclose material facts and the time the true facts

were disclosed, without knowledge of the misrepresented or omitted facts.

190. At all relevant times, the market for Idearc securities was efficient for the following

reasons, among others:

(a) Idearc common stock met the requirements for listing, and was listed and

actively traded during the Class Period, on the NYSE;

(b) Idearc common stock was regularly followed by securities analysts employed

by major brokerage firms who wrote reports that were distributed to the sales force and customers of

their respective brokerage firms; and

(c) Idearc regularly communicated with the public and investors via established

market communication mechanisms, including via regular dissemination of press releases on major

news wire services and through other wide-ranging public disclosures, such as communications with

the financial press, securities analysts and other similar reporting services.

191. As a consequence, the markets for Idearc securities digested current information with

respect to Idearc from publicly available sources and reflected such information in the price of

Idearc’s securities. Under these circumstances, all purchasers or acquirers of Idearc securities during

- 81 -506038_1


the Class Period suffered similar injury through their purchase of securities at artificially inflated

prices and, thus, a presumption of reliance applies.

PROXIMATE LOSS CAUSATION/ECONOMIC LOSS

192. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive investors and the market and a course of conduct that artificially inflated and maintained

Idearc’s stock price and operated as a fraud or deceit on Class Period purchasers of the Company’s

publicly traded securities by misrepresenting and omitting material information including that the

Company was experiencing significant increased uncollectible receivables as a result of the

elimination of Idearc’s collections department, inadequate measures to inform Idearc’s customers of

new billing procedures post spin-off, improper revenue recognition, inadequate bad debt reserves

and manipulation of bad debt levels on Idearc’s financial statements. When defendants’

misrepresentations and omissions were revealed, as detailed in ¶¶58-67, 70-74, 100-107, 109, 111,

114-122, Idearc’s stock price fell precipitously as the prior artificial inflation came out of the price.

As a result of their purchases of Idearc securities during the Class Period, plaintiffs and other

members of the Class suffered significant economic loss, i.e., damages, under the federal securities

laws.

193. Defendants’ false statements and omissions, identified herein at ¶¶38-43, 46-54, 58-

67, 70-74, 77-84, 87-91, 93-96, 100-107, 109-111, had the intended effect and caused Idearc’s stock

to trade at artificially inflated levels. As a direct result of the disclosures on February 7, July 29 and

October 30, 2008, however, Idearc’s stock price suffered material, statistically significant declines.

194. On February 7, 2008, the Company announced higher than expected days sales

outstanding levels associated with Idearc’s accounts receivables, which decreased the Company’s

reported free cash flow levels. Defendants, however, attributed the increase to a one time event

associated with the transition of customer billing from the Verizon based system to direct billing by

- 82 -506038_1


Idearc. Defendants also emphasized that the Company’s bad debt levels remained constant with

prior periods and that the Company had a “strong and stable cash flow” that was “servicing

[Idearc’s] debt.” This news caused Idearc’s stock price to fall 36% between the close of trading on

February 6, 2008 and the close of trading on February 8, 2008.

195. On July 29, 2008, the Company announced that its bad debt levels had risen to 6.25%

due, in part, to the Company having previously relaxed its credit policies. The Company announced,

however, that Idearc’s credit policies had been reviewed, were appropriate, and were in place and

working, and that Idearc’s “ability to deal with our debt obligation is absolutely secure,” and “we see

no near-term liquidity issues and continue to be confident in our ability and capacity to service our

debt.” Klein also told investors and that Idearc’s “issues and problems” were not due to the

“vagaries of a recessionary economy.” This news caused the Company’s stock price to fall 40%

between the close of trading on July 28 and the close of trading on July 29, 2008.

196. On October 30, 2008, the Company announced that Idearc’s bad debt had shot up to

8.2%, that the Company had hired financial advisors to review “alternatives related to our capital

structure,” that $247 million of the $250 million in credit revolver had been drawn down, and that

Idearc faced delisting by the NYSE. This news caused the Company’s stock price to fall 36%,

between close of trading on October 29 and close of trading on October 30, 2008.

197. The drops on February 7-8, July 29 and October 30, 2008 removed the inflation from

Idearc’s stock price, causing real economic loss to investors who had purchased the Company’s

publicly traded securities during the Class Period.

198. The decline in Idearc’s stock price at the end of the Class Period was a direct result of

the nature and extent of defendants’ prior false statements and omissions being revealed to investors

and the market. The timing and magnitude of Idearc’s stock price declines negate any inference that

the loss suffered by plaintiff and other Class members was caused by changed market conditions,

- 83 -506038_1


macroeconomic or industry factors or Company-specific facts unrelated to the defendants’ fraudulent

conduct. The economic loss – damages – suffered by plaintiffs and other members of the Class was

a direct result of defendants’ fraudulent scheme to artificially inflate Idearc’s stock price and

maintain the price at artificially inflated levels and the subsequent significant decline in the value of

Idearc’s stock when defendants’ prior misrepresentations and omissions were revealed.

CLASS ALLEGATIONS

199. Plaintiff brings 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 purchasers and acquirers of Idearc

securities during the Class Period (the “Class”) between August 9, 2007 and October 30, 2008.

Excluded from the Class are Defendants, the officers and directors of the Company, 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.

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

impracticable. Throughout the Class Period, Idearc’s securities were actively traded on the NYSE.

While the exact number of Class members is unknown to plaintiff at this time and can only be

ascertained through appropriate discovery, plaintiff believes that there are thousands of members in

the proposed Class. Record owners and other members of the Class may be identified from records

maintained by Idearc 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.

201. Plaintiff’s claims are typical of the claims of the members of the Class as all members

of the Class were similarly affected by defendants’ wrongful conduct in violation of federal law that

is complained of herein.

202. Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

- 84 -506038_1


203. 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 and

omissions as alleged herein;

(b) Whether statements made by defendants to the investing public during the

Class Period misrepresented and omitted material facts about the business and operations of Idearc;

and

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

proper measure of damages.

204. 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.

COUNT I

Violation of §10(b) of the Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants

205. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

206. During the Class Period, defendants disseminated or approved the materially false

and misleading statements specified above, which they knew or deliberately disregarded, were

misleading in that they contained misrepresentations and failed to disclose material facts necessary

in order to make the statement made, in light of the circumstances under which they were made, not

misleading.- 85 -

506038_1


207. Defendants: (a) employed devices, schemes and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements

made not misleading; and (c) engaged in acts, practices and a course of business which operated as a

fraud and deceit upon the purchasers or acquirors of the Company’s publicly traded securities in an

effort to maintain artificially high market prices for Idearc’s publicly traded securities in violation of

§ 1 0(b) of the Exchange Act and Rule 1 0b-5. All defendants are sued either as primary participants

in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

208. Defendants had actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and

to disclose such facts, even though such facts were available to them. As such, defendants’ material

misrepresentations and/or omissions were made knowingly or with a reckless disregard for the truth

and for the purpose and effect of material information about the integration of the acquired

businesses and supporting the artificially inflated prices of the Company’s publicly traded securities.

209. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Idearc’s publicly traded

securities were artificially inflated during the Class Period. In ignorance of the fact that the market

price of Idearc’s publicly traded securities was artificially inflated, and relying directly or indirectly

on the false and misleading statements made by defendants, or upon the integrity of the markets in

which the securities trade and/or on the absence of material adverse information that was known to

or recklessly disregarded by defendants, but not disclosed in public statements by defendants during

the Class Period, plaintiff and the other members of the Class acquired Idearc publicly traded

securities during the Class Period at artificially inflated prices and were damaged when the artificial

inflation came out of the securities.

- 86 -506038_1


210. At the time of said misrepresentations and omissions, plaintiff and other members of

the Class were ignorant of their falsity, and believed them to be true. Had plaintiff, the other

members of the Class and the marketplace known the truth regarding the condition of Idearc’s

business operations and prospects, which were not disclosed by defendants, they would not have

purchased or otherwise acquired their Idearc publicly traded securities, or, if they had acquired such

securities during the Class Period, they would not have done so at the artificially inflated prices

which they paid.

211. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s publicly traded securities during the Class Period.

COUNT II

Violation of §20(a) of the Exchange ActAgainst All Defendants

212. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

213. Defendants acted as controlling persons of Idearc within the meaning of §20(a) of the

Exchange Act as alleged herein. By virtue of their high level positions, and their ownership and

contractual rights, participation in and awareness of the Company’s operations and intimate

knowledge of the false statements and omissions made by the Company and disseminated to the

investing public, defendants had the power to influence and control and did influence and control,

directly or indirectly, the decision making of the Company, including the content and dissemination

of the various statements which plaintiff contends are false and misleading. The defendants

participated in conference calls with investors and were provided with or had unlimited access to

copies of the Company’s reports, press releases, public filings and other statements, alleged by

- 87 -506038_1


plaintiff to be misleading, prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

214. In particular, each of the defendants had direct and supervisory involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same.

215. As set forth above, each of the defendants violated § 10(b) and Rule 1 0b-5 by their

acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons,

the defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of

defendants’ wrongful conduct, plaintiff and other members of the Class suffered damages in

connection with their purchases of the Company’s publicly traded securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, plaintiff respectfully prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, and certifying plaintiff as class

representative under Federal Rule of Civil Procedure 23;

B. Awarding compensatory damages in favor of plaintiff and the other members of the

Class against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

D. Such equitable, injunctive or other and further relief as the Court may deem just and

proper.

- 88 -506038_1


JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: February 11, 2010 COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

DEBRA J. WYMANJULIE A. KEARNS

s/DEBRA J. WYMAN DEBRA J. WYMAN

655 West Broadway, Suite 1900San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)

Lead Counsel for Plaintiffs

KENDALL LAW GROUP, LLPJOE KENDALL (State Bar No. 11260700)HAMILTON LINDLEY (State Bar No. 24044838)3232 McKinney Avenue, Suite 700Dallas, TX 75204Telephone: 214/744-3000214/744-3015 (fax)

Liaison Counsel

ROBBINS UMEDA LLPCRAIG W. SMITH600 B Street, Suite 1900San Diego, CA 92101Telephone: 619/525-3990619/525-3991 (fax)

GLANCY BINKOW & GOLDBERG LLPLIONEL Z. GLANCY1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: 310/201-9150310/201-9160 (fax)

Additional Counsel for Plaintiff

- 89 -506038_1


CERTIFICATE OF SERVICE

I hereby certify that on February 11, 2010, I electronically filed the foregoing with the Clerk

of the Court using the CM/ECF system which will send notification of such filing to the e-mail

addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have

mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF

participants indicated on the attached Manual Notice List.

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on February 11, 2010.

s/ DEBRA J. WYMAN DEBRA J. WYMAN

COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

655 West Broadway, Suite 1900San Diego, CA 92101-3301Telephone: 619/231-1058619/231-7423 (fax)E-mail:[email protected]

506038_1506038_1

District Version 3.2.3 Page 1 of 1Case 3:09-cv-00791-K Document 55 Filed 02/11/2010 of 93

Mailing Information for a Case 3:09-cv-00791-K

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Thomas E [email protected],[email protected]

• Roger F [email protected]

• Matthew F [email protected]

• Lionel Z [email protected] ,[email protected] ,[email protected] ,[email protected],[email protected]

• Julie A [email protected] ,[email protected]

• Dee J Kelly , [email protected] ,[email protected]

• Joe [email protected] ,[email protected]

• Eric F [email protected]

• Hamilton [email protected],[email protected]

• Roger L [email protected],[email protected] ,[email protected]

• Kelly M [email protected] ,[email protected]

• Thomas J [email protected]

• Marcus G [email protected],[email protected]

• Scott E [email protected]

• Craig Wallace [email protected],[email protected]

• Richard Earl [email protected]

• Debra J [email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). Youmay wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for theserecipients.

• (No manual recipients)

https://ecf.txnd.uscourts.gov/cgi-bin/MailList.pl?741053998651801-L_426_0-1 2/11/2010

case 3:09-cv-00791-k document 55 filed 02/11/2010 page 1 of...

Documents