1 robbins geller rudman & dowd llp 2...

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ROBBINS GELLER RUDMAN & DOWD LLP

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SHAWN A. WILLIAMS (213113) MATTHEW S. MELAMED (260272)

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Post Montgomery Center One Montgomery Street, Suite 1800

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San Francisco, CA 94104 Telephone: 415/288-4545

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415/288-4534 (fax) [email protected]

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[email protected]

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Lead Counsel for Plaintiff

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CEMENT MASONS & PLASTERERS JOINT ) No. 3:11-cv-01016-SC PENSION TRUST, Individually and on Behalf )

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of All Others Similarly Situated, ) CLASS ACTION )

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Plaintiff, ) SECOND AMENDED COMPLAINT FOR ) VIOLATION OF THE FEDERAL

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vs. ) SECURITIES LAWS )

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EQUINIX, INC., STEPHEN M. SMITH, and ) KEITH D. TAYLOR, )

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) Defendants. )

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) DEMAND FOR JURY TRIAL

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1 TABLE OF CONTENTS

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INTRODUCTION AND OVERVIEW ...............................................................................1

JURISDICTION AND VENUE ..........................................................................................7

PARTIES.............................................................................................................................8

CONTROLPERSONS ........................................................................................................9

SOURCES OF INFORMATION ......................................................................................11

BACKGROUND TO DEFENDANTS’ SCHEME ...........................................................12

A. Investors Cited Equinix’s Pricing Power and Consistency as a Primary Reason for Investing in the Company ....................................................................13

B. Equinix Announces 1Q10 Financial Results and Reaffirms Continuing PricingPower .........................................................................................................15

C. After Long Department of Justice Antitrust Inquiry, Equinix Closes Switch & Data Acquisition; “Pricing Leverage” Is Key to Acquisition’s Upside....................................................................................................................18

D. In Advance of the 2Q09 Financial Results and Conference Call, Analysts Signaled that Two of Investors’ Most Pressing Concerns Were Pricing Stability and Sales Force Integration .....................................................................22

FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD.............................................................................................................................24

A. July 28, 2010 False and Misleading Statements ....................................................24

1. False and Misleading Statement: Sales Force Integration .........................24

2. False and Misleading Statement: Pricing Power .......................................25

3. False and Misleading Statement: Pricing ...................................................26

4. Investor Reaction to the July 28, 2010 Statements Demonstrates the Materiality and Significance of the Company’s Pricing Discipline and the Integration of Switch & Data .......................................26

5. Reasons Why the Pricing Power Statements in ¶¶103-106 Were Falseand Misleading .................................................................................30

6. Reasons Why the Sales Force Integration Statements in ¶102 Were Falseand Misleading .................................................................................32

B. False and Misleading Statements to RBC Capital Around September 1, 2010........................................................................................................................33

SECOND AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - - i - 3:11-cv-01016-SC

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1. False and Misleading Statements: Pricing Power and Sales Force Integration..................................................................................................34

4 2. Reasons Why the Statements in ¶135 Were False and Misleading ...........35

5 C. September 15 and 22, 2010 False and Misleading Statements ..............................36

6 1. False and Misleading Statements: Pricing Power and Sales Force

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Integration..................................................................................................36

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2. False and Misleading Statement: Pricing Power .......................................37

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3. Reasons Why Statements in ¶¶141-142 Were False and Misleading ........38

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VIII. THE TRUTH IS REVEALED ...........................................................................................39

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A. Equinix’s October 5, 2010 Press Release and Investor Conference Call ..............39

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B. Investors React to the October 5, 2010 Disclosures and Equinix’s Stock Plummets................................................................................................................43

13 IX. LOSS CAUSATION ..........................................................................................................48

14 X. NO SAFE HARBOR .........................................................................................................50

15 XI. CLASS ACTION ALLEGATIONS ..................................................................................51

16 A. Count One – For Violation of §10(b) of the 1934 Act and Rule 10b-5

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Against All Defendants ..........................................................................................52

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B. Count Two – For Violation of §20(a) of the 1934 Act Against All Defendants.............................................................................................................52

19 XII. PRAYER FOR RELIEF ....................................................................................................53

20 XIII. JURY DEMAND ...............................................................................................................53

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SECOND AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - - ii - 3:11-cv-01016-SC

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1 I. INTRODUCTION AND OVERVIEW

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1. This is a securities class action on behalf of all persons who purchased or otherwise

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I acquired the common stock of Equinix, Inc. (“Equinix,” the “Company,” or “EQIX”) between July

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29, 2010 and October 5, 2010, inclusive (the “Class Period”), for violations of §§10(b) and 20(a) of

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1 the Securities Exchange Act of 1934 (the “1934 Act”) and U.S. Securities and Exchange

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1 Commission (“SEC”) Rule 10b-5 promulgated thereunder. The action is brought against the

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Company, its Chief Executive Officer (“CEO”) Stephen M. Smith, and its Chief Financial Officer

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(“CFO”) Keith D. Taylor. 1

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2. Equinix is a public corporation incorporated in Delaware and headquartered in

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I Redwood City, California. The Company provides carrier-neutral data centers and internet

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exchanges. According to its 2010 Form 10-K filed with the SEC, Equinix connects businesses with

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partners and customers around the world through a global platform of high performance data centers

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called “IBXs” (for International Business Exchanges). Equinix states that its IBX data centers

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enable customers to safeguard their infrastructure, house their assets and applications closer to users,

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and collaborate easily with partners and customers. The Company operates 92 IBX data centers in

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35 markets in North America, Europe, and Asia-Pacific.

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3. Key to Equinix’s products and service offering is “network neutrality.” This means

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I that, rather than selling a particular network, Equinix’s customers can interconnect directly with

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numerous different bandwidth providers, including some of the world’s top Internet Service

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Providers, broadband access networks, and international carriers. Network neutrality also means that

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Equinix customers can choose to purchase from or partner with a number of companies who also

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utilize Equinix IBXs. Traditionally, Equinix’s customers are large telecommunications carriers that

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bundle their telecommunications and managed services with colocation offerings. Some customers,

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such as Google and Microsoft, operate their own data centers for large infrastructure deployments,

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but rely upon Equinix IBX data centers for a number of their interconnection relationships.

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27 1 Equinix, Smith, and Taylor are referred to collectively as “Defendants.”

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SECOND AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 3:11-cv-01016-SC - 1 -

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4. Equinix generates substantially all of its revenue through three offerings available to

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customers at its 92 IBX data centers: colocation, interconnection, and managed IT infrastructure

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1 services.

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5. Colocation Services. Colocation services include cabinets, power and operations and

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I storage space for customers’ colocation needs. The Company’s IBX data centers provide customers

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I with secure, reliable and fault-tolerant colocation environments that are necessary for internet

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commerce interconnection. Many of the IBX data centers include multiple layers of physical

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1 security; scalable cabinet space availability; on-site, trained staff available 24 hours per day, every

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day; dedicated customer care and equipment staging areas; redundant power; and fault-tolerant

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infrastructure systems. Colocation services account for almost 80% of Equinix’s revenues.

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6. Interconnection Services. Interconnection services include cross-connects and switch

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1 ports on the Equinix Internet Exchange and Equinix Carrier Ethernet Exchange Services. Through

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these services, the Company provides scalable and reliable connectivity that allows customers to

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exchange internet traffic directly with the service provider of their choice or with each other,

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creating what Equinix refers to as an “ecosystem” for the exchange of data between strategic

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partners. Interconnection services account for approximately 14% of Equinix’s revenues.

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7. Managed IT Services. Managed IT infrastructure services allow Equinix’s customers

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to leverage the Company’s telecommunications expertise, maximize the benefits of its IBX data

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centers and optimize their infrastructure and resources. Managed IT infrastructure services account

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for approximately 2.5% of Equinix’s revenues.

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8. As detailed below, the Company’s pricing power, premium pricing, or pricing

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1 discipline was its most widely lauded value proposition. In fact, even prior to the Class Period,

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analysts repeatedly extolled the Company’s “pricing leverage,” “pricing power,” and “robust

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pricing” as the key metric to measure and evaluate the Company’s investment value.

25 . “In markets with capacity available, pricing is even stronger and the company is not sacrificing price to increase near term volumes and remains a 20-40%

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premium to its peers . ”

27 . “[I]ncreased scale and dominant market position should allow EQIX to sustain its competitive advantage and pricing power for at least the next two years . ”

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9. Just prior to the Class Period, however, one of the Company’s key competitors

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I revealed that it was being pressured to discount its contract-renewal prices by 5%. This revelation

caused analysts and investors to worry that Equinix was facing the same pricing pressures.

10. On July 28, 2010, Equinix issued a press release announcing its second quarter 2010

(“2Q10”) financial results and issuing a revenue and earnings forecast for 3Q10 and FY10. 2 In

1 addition, the Company noted that the integration of Switch & Data Facilities Co., Inc. (“Switch &

I Data”), which Equinix acquired in a deal consummated on April 30, 2010, was “ahead of schedule”:

“Equinix saw strong Q2 financial results in all three of its operating regions and is on target to meet 2010 objectives,” said Steve Smith, CEO and President of Equinix. “The integration of Switch and Data is ahead of schedule, and our expansions are providing us much needed capacity in many of our key markets, which positions us well for further growth .”

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Business Outlook

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For the full year of 2010, total revenues are expected to be in the range of$1,225.0 to $1,235.0 million .

11. Later that same day, Equinix hosted a conference call to discuss second quarter

earnings and 3Q10 and FY10 guidance. In response to questions about competitors experiencing

pricing pressure and how competition was affecting pricing at Equinix, Defendants falsely assured

investors that the Company’s disciplined approach to pricing, whereby it offered discounts only to

select, strategic customers, was intact and that notwithstanding new and growing competition, the

Company would not trade price for volume:

2 The Court held that the Company’s July 28, 2010 financial forecasts for 3Q10 and FY10 were not actionable because they fall under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) safe harbor for forward-looking statements, and that Defendants had no duty to update forward-looking statements. Dkt. No. 29. None of the false and misleading statements that Plaintiffs allege herein were forward looking. Specifically, Plaintiffs no longer allege that the July 28, 2010 financial forecasts for 3Q10 and FY10 were actionably false and no longer allege that Defendants had a duty to correct the July 28, 2010 financial forecasts for 3Q10 and FY10. Similarly, the Court held that Taylor’s September 15, 2010 statement that Defendants “ha[d] a high degree of confidence in [their] ability” to offer guidance was a non-actionable expression of corporate optimism and, even if actionable, the complaint did not demonstrate its falsity. Id. Plaintiffs no longer allege that Taylor’s September 15, 2010 statement was actionably false.


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“ We’re maintaining the discipline on the floors and ceilings we have on our pricing and the sales force is staying very, very disciplined on price .”

“Overall North America pricing remains firm across both the organic and the Switch and Data footprint.”

In truth, however, former Equinix employees report that the Company regularly

1 issued price discounts before and during the Class Period that often exceeded 10%. According to

one former Equinix Regional Director, she was empowered to approve the issuance of discounts up

to 30%. 3 The undisclosed magnitude and breadth of the discounts Equinix provided its customers

I demonstrates that pricing was neither firm nor stable and shows that the Company was, in fact,

trading price for volume.

13. In addition to false representations concerning the firmness and stability of the

1 Company’s pricing structures, on July 28, 2010, Defendants also made materially false statements

concerning the current integration status of the Switch & Data sales force into Equinix. In response

to analyst inquiries, Defendants specifically stated that “[t]he sales organizations have been

completely integrated” and “[w]e’ve got the sales forces cross-selling into both assets”:

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“The sales organizations have been completely integrated with full cost synergies already achieved in the sales function.”

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“ We’ve got the sales forces cross-selling into both assets. They’re all part of one team today, the organization is completely finished in sales . . . .”

14. Neither of these statements were true. Reports from former employees provide facts

I sharply inconsistent with such representations. For example, former employees report that the

integration of the Switch & Data and Equinix sales forces during the Class Period was largely a

failure. As opposed to cross-selling into both assets, former employees report that during the Class

I Period, former Switch & Data sales representatives were concealing opportunities for fear that they

would be usurped by Equinix sales personnel. The failure of the cross-selling efforts resulted in the

Company missing out on a number of deals.

3 The pronoun “she” is utilized generically to refer to each individual former employees referenced herein. Its use should not be understood to indicate gender.

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15. As a result of Defendants’ July 28, 2010 false statements, Equinix stock rose from

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$88.06 on July 28, 2010, to $93.82 on July 29, 2010.

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16. Additional false statements during the Class Period served to maintain the artificial

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1 inflation of the stock price, including statements in September 2010 that in substance reiterated the

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1 July 28 misrepresentations:

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“[T]he pipeline’s as healthy as it’s ever been. Our close rates are good . We’re continuing to sell across our verticals, across our markets and certainly across our

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regions. And we’re cross-selling within the Switch and Data asset and the Equinix asset .”

8 “Look, we can win on price if we want to win on price. I think you’ve heard us say

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periodically we’re not going to trade price for volume. ”

10 . “[T]his is sort of a consistent message you’ve heard from us previously, that pricing is stable, it’s firm. It is at the price point that we would like to see as a

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company. ”

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17. Then, on October 5, 2010, the Company pre-announced 3Q10 revenue and earnings

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I results, and revised downward the Company’s FY10 revenue forecasts. The Company announced

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I that Equinix would miss its 3Q10 and FY10 revenue and earnings forecasts. The reasons given were

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I sharply inconsistent with the Company’s prior representations and assurances. The press release

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I stated that the forecast revisions were due, in part, to:

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“Equinix provided discounted prices to secure contract renewals ”; and

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“Switch & Data revenue would be lower than expected .”

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On an investor conference call later the same day the Company also revealed that, in

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contrast to earlier representations that the sales organizations were already “completely integrated”

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and that the “organization [was] completely finished in sales,” the Company, in fact, “still ha[d]

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work to do to realign the combined sales organizations,” directly contradicting the prior statements.

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1 As a result of Defendants’ materially false and misleading statements and the October 5, 2010

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disclosures, the market sent the Company’s stock price tumbling from a Class Period high of

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$105.09 on October 5, 2010, to $70.34 the next day – a one-day loss of over 33% of shareholder

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equity.

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19. The side-by-side tables below contrast the Company’s Class Period materially false

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1 and misleading statements with the truth revealed on the October 5, 2010 conference call.


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Class Period Representations October 2010 Disclosures

A. “The sales organizations have been completely “We still have work to do to integrated with full cost synergies already achieved realign the combined sales in the sales function.” organizations, but our

expectations are that we will see “We’ve got the sales forces cross-selling into both improvement in the utilization of assets. They’re all part of one team today, the the former Switch and Data organization is completely finished in sales, so the assets as we exit 2010.” structure all the way up to the sales leader in North America has been in place for weeks now.”

B. “Overall North America pricing remains firm across “[D]uring the second and third both the organic and the Switch and Data footprint.” quarters, there were certain

discounts and credit memos “We’re maintaining the discipline on the floors and issued to a number of strategic ceilings we have on our pricing and the sales force customers in exchange for is staying very, very disciplined on price.” longer-term contracts. As we’ve

discussed in the past, we have “[T]his is sort of a consistent message you’ve heard been incenting our salesforce to from us previously, that pricing is stable, it’s firm. extend the contract terms of It is at the price point that we would like to see as a magnet customers, though this company.” can result in a price concession

for some.”

“There are magnets that we will go after, and we will adjust. In this case, it’s just over 10% is the effect of the adjustment to their existing pricing.”

C. “Look, we can win on price if we want to win on “We historically have said we price. I think you’ve heard us say periodically will not trade volume for price. we’re not going to trade price for volume.” But these are strategic magnets.”

“[W]e are not going to damage, if you will, the “[W]here we get pressure on output because we think it is very important to pricing, if a large customer is maintain pricing. . . . [W]e are not going to trade willing to commit long term in price for volume. . . . I would give growth away to large volume, we are going to make sure we are very prudent on price.” get flexible in our pricing with

them.”4

4 The Court’s March 2, 2012 Order found that Defendants had maintained a consistent position on pricing throughout the Class Period. Dkt. No. 29 at 14. The Second Amended Complaint better identifies detailed inconsistencies in the representations. In addition, Plaintiffs now allege that Equinix not only admitted providing discounts to “a number of” customers, but that the discounts actually provided were both wider and of far greater magnitude than Equinix admitted on October 5, 2010.


20. Analyst and investor reactions to the new information in the October 5, 2010 press

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I release and conference call were sharply critical of the Company, directly challenged defendants’

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credibility, and questioned the contrast between statements made during the Class Period regarding

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1 pricing discipline. One analyst specifically noted in the context of the sharp stock price decline that

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the disclosure regarding Switch & Data was exactly what “people were afraid of” and that prices,

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I which Defendants had assured were stable, were actually falling:

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“Obviously, look, the stock is down as much as $20 in the aftermarket. And what people are reading into this is that you’ve somehow mismanaged the Switch and

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Data merger transaction, which people were afraid of; that prices are coming down in the industry faster than people thought ; and that[] now you’ve lost your

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ability to forecast . . . .”

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21. Analysts also noted that it wasn’t the fact that the Company missed the revenue

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forecast and reduced 2010 financial guidance that was troubling. Rather, it was the new information

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1 about pricing trends and the magnitude of discounts, which were of qualitative significance and put

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management’s credibility in question, that led to the steep decline in the Company’s stock price:

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“[M]anagement credibility has become increasingly questionable ,” and that “[w]hile the revenue reduction was modest , . . . it may be indicative of underlying

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trends in Equinix’s business .”

16 . “We had expected the rate of price increases to moderate going forward, but the magnitude of discounts on large deals surprised us .”

17 . “[T]hese issues raise larger questions of management credibility and control over

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the integration process , considering the positive tone of conversation over the past several months .”

19 “Although the reduction in revenue guidance was not materially large, we found

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the qualitative commentary regarding pricing/competitive issues more concerning .”

21 22. All of these facts as detailed herein particularly allege actionable misrepresentations

22 of material fact which caused investors’ economic loss. Plaintiffs bring this suit to recover those

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24 II. JURISDICTION AND VENUE

25 23. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise

26 under §§10(b) and 20(a) of the 1934 Act and SEC Rule 10b-5.

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24. Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false

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and misleading statements were made in or issued from this district.

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25. Equinix maintains its principal executive office at One Lagoon Drive, 4th Floor,

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Redwood City, California 94065. Certain of the acts and conduct complained of herein, including

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the dissemination of materially false and misleading information to the investing public, occurred in

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1 this District.

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26. In connection with the acts and conduct alleged in this complaint, defendants, directly

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

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to, interstate mail, interstate wire, interstate telephone communications.

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III. PARTIES

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27. Lead plaintiff International Brotherhood of Electrical Workers Local 697 Pension

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I Fund purchased the common stock of Equinix during the Class Period, and was damaged as the

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result of defendants’ wrongdoing as alleged herein.

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28. Plaintiff Cement Masons & Plasterers Joint Pension Trust purchased the common

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stock of Equinix during the Class Period, and was damaged as the result of defendants’ wrongdoing

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as alleged herein. Cement Masons & Plasterers Joint Pension Trust and International Brotherhood of

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Electrical Workers Local 697 Pension fund are referred to herein as “Plaintiffs.”

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29. Defendant Equinix is a Delaware corporation with its principal executive offices in

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Redwood City, California.

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30. Defendant Stephen M. Smith (“Smith”) joined Equinix in 2007, when he was named

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the Company’s President, CEO and a director. Prior to becoming President and CEO of Equinix,

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Smith served as Senior Vice President of HP Services at Hewlett-Packard Co. and Vice President of

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Global Professional and Managed Services at Lucent Technologies.

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31. Defendant Keith D. Taylor (“Taylor”) joined the Company in 1999 and has served as

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its CFO since 2005. Prior to serving as the Company’s CFO, Taylor served as the Company’s

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Director of Finance and Administration, Vice President, and Finance and Chief Accounting Officer.

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32. The defendants referenced above in ¶¶30-31 are referred to herein as the “Individual

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Defendants.”


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

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I the power and authority to control the contents of Equinix’s quarterly reports, press releases and

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I presentations to the market by way of securities analysts, money and portfolio managers, and

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1 institutional investors. The Individual Defendants were provided with copies of the Company’s

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

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

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

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

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

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I representations being made were at the time they were made materially false and misleading. The

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

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34. Defendants are liable for (i) making false statements or (ii) failing to disclose adverse

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I facts known to them about Equinix. Defendants’ fraudulent scheme and course of business that

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operated as a fraud or deceit on purchasers of Equinix common stock was a success: (i) it deceived

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the investing public regarding Equinix’s current business strength and financial condition, (ii) it

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artificially inflated the price of Equinix common stock, and (iii) it induced Plaintiffs and other

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members of the Class to purchase Equinix common stock at inflated prices.

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IV. CONTROL PERSONS

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35. Because of the Individual Defendants’ executive management positions at the

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I Company, they had access to and knew about the adverse undisclosed information about its business,

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operations, products, operational trends, financial statements, markets, and present and future

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business prospects via access to internal corporate documents (including the Company’s operating

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plans, budgets and reports of actual operations compared thereto), conversations and connections

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with other corporate officers and employees, attendance at management and/or Board of Directors

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meetings and committees thereof, and via reports and other information provided to them in

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connection therewith.

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36. It is appropriate to treat the Individual Defendants as a group for pleading purposes

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I and to presume that the false, misleading and incomplete information conveyed in the Company’s


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I public filings, press releases, and other publications as alleged herein are the collective actions of the

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1 narrowly defined group of defendants identified above. The Individual Defendants, by virtue of

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1 their high-level positions with the Company, directly participated in the management of the

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1 Company, were directly involved in the day-to-day operations of the Company at the highest levels,

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I and were privy to confidential proprietary information concerning the Company and its business,

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I operations, products, growth, financial statements, and financial condition, as alleged herein. The

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Individual Defendants were involved in drafting, producing, reviewing and/or disseminating the

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false and misleading statements and information alleged herein; were aware, or recklessly

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1 disregarded, that the false and misleading statements were being issued regarding the Company; and

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approved or ratified these statements in violation of the federal securities laws.

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37. As officers and controlling persons of a publicly held Company whose common stock

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1 was, and is, registered with the SEC pursuant to the 1934 Act, traded on the NASDAQ, and

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governed by the provisions of the federal securities laws, the Individual Defendants each had a duty

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to promptly disseminate accurate and truthful information with respect to the Company’s financial

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condition and performance, growth, operations, financial statements, business, products, markets,

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management, earnings, and present and future business prospects, and to correct any previously

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issued statements that had become materially misleading or untrue, so that the market prices of the

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Company’s publicly traded securities would be based upon truthful and accurate information. The

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Individual Defendants’ misrepresentations and omissions during the Class Period violated these

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specific requirements and obligations.

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38. As alleged above, the Individual Defendants participated in the drafting, preparation,

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and/or approval of the various press releases, shareholder reports, SEC filings, and other public

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statements/communications complained of herein and were aware of, or recklessly disregarded, the

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misstatements contained therein and omissions therefrom, and were aware of their materially false

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and misleading nature. Each Individual Defendant was provided with copies of the documents

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alleged herein to be misleading prior to or shortly after their issuance, or had the ability or

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opportunity to prevent their issuance or to cause them to be corrected. In fact, the Individual

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Defendants certified the accuracy of their year-end results, and consented to the content of the


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financials. Accordingly, each of the Individual Defendants is responsible for the accuracy of the

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public reports and releases detailed herein and is therefore primarily liable for the representations

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contained therein.

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39. Equinix and each of the Individual Defendants are liable as participants in a scheme

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and course of business that operated as a fraud or deceit on purchasers of Equinix publicly traded

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securities by disseminating materially false and misleading statements and/or concealing material

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adverse facts. The scheme deceived the investing public regarding Equinix’s business, operations,

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management and the intrinsic value of Equinix publicly traded securities.

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V. SOURCES OF INFORMATION

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40. Plaintiffs’ allegations, based upon information and belief, are supported by five

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former employees of Equinix. Information provided by the former employees is reliable and

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credible because each witness: (a) worked at Equinix during the Class Period; (b) possessed a job

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title and responsibilities demonstrating that she was in a position to know the information provided;

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(c) provided an account that corroborates, and is corroborated by, the accounts of the other former

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employees; and (d) provided an account that corroborates, and is corroborated by, the other

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information alleged herein.

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41. Former Employee Number One (“FE1”) worked at Switch & Data from 2001, where

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she was Director of Channel Marketing, until Switch & Data was acquired by Equinix in April 2010,

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at which time FE1 became employed by Equinix in the same role until she was laid off in October

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2010.

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42. Former Employee Number Two (“FE2”) began working at Switch & Data in 2004,

22

where she was employed in both the Direct Sales and Indirect Sales groups. When Equinix acquired

23

Switch & Data in April 2010, FE2 became a member of the Equinix U.S. Sales Group as a sales

24

representative until late 2011.

25

43. Former Employee Number Three (“FE3”) was employed by Switch & Data from

26

May 2009 through its acquisition by Equinix in April 2010. When Equinix acquired Switch & Data,

27

FE3 became a Senior Vertical Marketing Manager at Equinix. FE3 remained in that position until

28

late 2011, when she left Equinix.


1

44. Former Employee Number Four (“FE4”) was employed at Switch & Data as a

2

1 Director of Product Management. When Equinix acquired Switch & Data in April 2010, FE4

3

1 became Global Product Manager and remained in that role until she was laid off in early 2011.

4

45. Former Employee Number Five (“FE5”) was employed at Switch & Data as Regional

5

1 Director, Inside Sales East from 2004 until it was acquired by Equinix in April 2010. FE5 retained

6

1 the same title and job responsibilities at Equinix until she left in April 2012. As a Regional Director,

7

FE5 directed a staff of sales representatives. At Equinix, her group was responsible for sales to

8

about 400-500 accounts.

9

VI. BACKGROUND TO DEFENDANTS’ SCHEME

10

46. Prior to and during the Class Period, Equinix was the colocation industry leader. It

11

1 was renowned in the market for both the facilities it operated and the prices it charged, which were at

12

a 20-40% premium over those of its competitors. Despite increasing competition, the Company was

13

admired for its ability to firmly hold onto its premium pricing and for its disciplined sales force.

14

Moreover, the Company’s leadership, including Smith and Taylor, were viewed as reliable stewards

15

of a strong company in an emerging market. Smith and Taylor were proud of the Company’s pricing

16

power. They informed the public that they were personally consulted when a large discount was

17

I considered, and were happy to tell investors that such consultations were rare. When Equinix

18

completed the Switch & Data acquisition in April 2010, they boasted that the integration would run

19

smoothly and that, among other reasons for the acquisition, their already considerable pricing power

20

would be consolidated.

21

47. Analysts relied on that picture in touting the Company’s strengths to investors.

22

I According to analysts, the Company’s pricing power was core to its strengths; the overwhelming

23

majority of analyst reports lauded the Company’s pricing power, which set it apart from competitors

24

that relied on discounts and promotions to attract customers. After the Switch & Data acquisition,

25

analysts praised the acquisition. Based on the Company’s track record and the content of its

26

statements announcing the deal, analysts were confident that the merger would live up to the

27

Company’s expectations. Further, analysts uniformly stated that the merger would sustain or

28


1

1 improve the Company’s pricing strength over its competitors. Put simply, Equinix was viewed by

2

1 the market as a tightly-run ship in a hot market space.

3

A. Investors Cited Equinix’s Pricing Power and Consistency as a Primary Reason for Investing in the Company

4 48. Defendants touted Equinix’s pricing power consistently prior to the Class Period, and

5 investors repeatedly cited pricing power as a principal reason for investing in Equinix securities.

6 Examples drawn from just several months before the Class Period demonstrate that analysts focused

7 consistently on Equinix’s “favorable” and “improving” pricing trends, and “firm” and “stable”

8 pricing, contrasting the Company’s pricing strength with competitors that “offer promotions.”

9 49. It was in fact the Company’s pricing discipline that investors viewed as the

10 Company’s key value proposition, which is evidenced by a long series of analysts’ commentaries

11 focused on that business metric. In advance of the Company’s 4Q09 and FY09 results, investors

12 commented on the Company’s “strong” and “stable” pricing. For example:

13 50. On January 7, 2010, Oppenheimer reported on Taylor’s comments at an investor

14 conference reiterating the fact that the Company’s growth was “ supported by . . . firm pricing

15 trends .” Ex. A.

16 51. On February 1, 2010, Wells Fargo Securities (“Wells Fargo”) stated: “Our channel

17 checks indicate that demand and pricing trends continue to improve .” Ex. B.

18 52. On February 5, 2010, Morgan Stanley issued a report stating: “ Strong pricing and

19 cross-connect additions should provide the growth drivers for the installed base.” The report

20 continued, “MRR per cabinet has continued to trend favorably since 1Q08.” 5 Ex. C.

21 53. On February 8, 2010, Morgan Joseph issued a report stating: “We believe December

22 quarter sales growth should be driven by the company’s Colocation business given continued

23 demand and favorable pricing .” Ex. D.

24 54. On February 10, 2010, the Company issued its 4Q09 and FY09 results. Smith stated:

25 “Overall we’re not seeing any significant changes to the competitive landscape, with pricing

26

27 5 “MRR,” as utilized by Equinix and herein, stands for Monthly Recurring Revenue.

28


1

I remaining firm for cabinets, power and interconnection.” Ex. E at 6. Taylor reinforced the point:

2

1 “[P]ricing is remaining firm, stable. That is what we like to say with our investors and people on the

3

1 call today.” Id. at 8.

4

55. In reaction to the 4Q09 and FY09 results, Investors remained enthusiastic about the

5

I Company’s pricing power. For example:

6

56. On February 11, 2010, Collins Stewart upgraded Equinix to “buy,” remarking on

7

I “[fJirmer than expected pricing environment across the markets due to strong demand and capacity

8

constraints” and “[h]igher than expected [colocation] pricing.” Ex. F.

9

57. On February 11, 2010, Oppenheimer issued a report stating: “Profitability again came

10

I above our forecast, as sustained cost discipline, better than expected top-line performance and firm

11

trends drove upside .” Ex. G at 2.

12

58. On February 11, 2010, SunTrust Robinson Humphrey (“SunTrust”) issued a report

13

1 stating: “Importantly, pricing remains steady . With limited capacity in many key markets, the

14

company has been able to hold very firm on pricing. In markets with capacity available, pricing is

15

even stronger and the company is not sacrificing price to increase near term volumes and remains a

16

20-40% premium to its peers.” Ex. H at 2.

17

59. On February 11, 2010, Wells Fargo issued a report stating: “Pricing remains very

18

as evidenced by a 9.6% growth in revenue/cab[inet] in Q4 vs closer to 8.0% on average in the

19

1 prior 3 quarters.” Ex. I.

20

60. On February 11, 2010, Morgan Joseph issued a report stating: “As expected, Equinix’

21

was solid in 4Q09 with weighted average recurring revenue per cabinet equivalent across all

22

I geographies increasing approximately 4% or more sequentially.” Ex. J.

23

61. In advance of the Company’s 1Q10 results, on April 15, 2010, Jefferies & Company

24

I instructed investors to “remain focused on EQIX’s pricing.” Ex. K. The report stated: “ [WJhile

25

some providers continue to offer promotions (e.g., free months, longer rev ramps, etc.), we believe

26

EQIX has remained disciplined on pricing in the U.S. ” Id. The report concluded, “We believe

27

investors should remain focused on EQIX’s pricing , as we believe the premium which EQIX is

28

demanding relative to other providers has expanded in recent periods.” Id.


1

62. On April 15, 2010, Morgan Joseph issued a report stating: “We believe March quarter

2

I sales should continue to be driven by Colocation revenue given strong demand and stable pricing .”

3

Ex. L.

4

B. Equinix Announces 1Q10 Financial Results and Reaffirms Continuing Pricing Power

5 63. The Company reaffirmed its pricing power when it announced its 1Q10 earnings. In

6 spite of aggressive competition, the Company announced that pricing remained stable. Moreover,

7 Equinix stated that it would not go below a discount threshold in competing for customers and its

8 sales force was disciplined in keeping discounts within the narrow range that enabled the Company

9 to retain its pricing power.

10 64. On April 21, 2010, approximately one week before the Company completed its

11 acquisition of Switch & Data, Equinix issued a press release announcing its 1Q10 earnings and

12 guidance. Ex. M. The press release stated that the Company had earned revenues of $248.6 million

13 for the quarter, a 3% increase over the pervious quarter and a 25% increase year over year. Id. Of

14 those revenues, $237.2 million, or over 95%, were recurring. Id. The press release also issued

15 revenue and earnings guidance for the 2Q10 and FY10. Id. Because most of the Company’s

16 revenue was based on contractual monthly fees, its revenue stream was recurring and thus highly

17 predictable. For 2Q10, the Company announced that it expected revenues to be in the range of $258

18 to $260 million. Id. For the full year, the Company announced that it expected revenues to be in the

19 range of $1.065 to $1.080 billion, a $10 million increase from the midpoint of the range in prior

20 expectations. Id.

21 65. That same day, Equinix hosted a conference call, during which Smith and Taylor

22 were asked about the strength of the Company’s “pricing power” – its ability to maintain its

23 premium pricing model without discounts or credits to customers. Ex. N at 8-9. In addition to

24 confirming that the Company and its sales personnel were holding steady on pricing due to a “very

25 disciplined” pricing approach, Smith assured investors that he and Taylor knew of any and all deals

26 that fell below the low end of the Company’s approved pricing range:

27

28


2

3

4

5

6

7

8

9

10

11

12

13 Id.

14

[ANALYST:] [O]n pricing power how long do you expect to see the strength in pricing? And are you seeing any competitors or new entran[ts] that are getting more aggressive on price in any of your markets?

*

[TAYLOR:] I say on pricing power and just our confidence around the conversion, certainly you see our confidence in the guidance we’ve delivered. . . . You get a sense on how much momentum we believe there is in the business.

* * *

[ANALYST:] Okay, great. Thanks, and on the competitive environment as far as newer entran[ts] or anyone getting aggressive?

[SMITH:] I tell you that happens metro by metro and we occasionally see that. There’s nothing new this quarter that we haven’t seen in the past. There’s aggressive competitors on certain deals, and we’re holding our strategy pretty steady. We’re not going to go below a threshold. Our sales force is very disciplined . Keith and I, as I’ve mentioned many times, look at any deal that has to go outside of the range we give to our sales forces. We just don’t have to do that very often. That’s a signal to us that the sales teams are holding pretty steady with the pricing that Keith talked about.

66. Another analyst asked about “the pricing environment in general.” Id. at 12. Smith

15

reiterated that “pricing is pretty darn stable .” Id.

16

[ANALYST:] What kind of bookings assumptions relative to 2009 are embedded in your 2010 revenue guidance? And my follow up, can you talk about the pricing

17

environment in general . . . .

18 * * *

19

[SMITH:] Keith mentioned pricing is pretty darn stable across our marketplace. . . .

20

Generally, we’re just holding pretty steady with the current pricing that’s out there today and negotiating off of that. And like I said earlier, we’re just not seeing

21

any meaningful change. Our sales team is doing a good job staying within the bands that we guide them by. There’s no undue pressure or anything that’s going on that’s

22

goofy.

23

Id.

24

67. Analysts reacted to the April 21, 2010 earnings announcement and conference call by

25

reiterating the Company’s pricing power. They noted that despite increased competition, Equinix

26

was able to hold firm on pricing and was not, as its competitors were, sacrificing price to increase

27

near-term volume. According to analysts, the Company’s pricing power drove upside and would

28

1 continue to do so for the foreseeable future.


1

68. On April 21, 2010, Wells Fargo issued a report entitled “EQIX: Solid Q1 Results –

2

1 Slightly Increasing Estimates.” Ex. O. The report stated: “ Pricing remains firm and the company

3

I experienced solid demand for cross connects and higher power deployments which drove a 12.2%

4

I yr./yr. increase in global recurring revenue per cabinet.” Id.

5

69. On April 22, 2010, SunTrust Robinson Humphrey (“SunTrust”) issued a report

6

1 entitled “1Q10 Review – Strong Results; Raised Guidance.” Ex. P. The report also lauded the

7

Company’s “solid” fundamentals, including “steady” pricing “at a 20-40% premium to its peers”:

8

While 1Q10 bookings were soft in the U.S., management described a strong sales pipeline and backlog of bookings that it expects to convert into billing in 2010. . . .

9

Importantly, pricing remains steady across all regions. With limited capacity in many key markets, the company has been able to hold firm on pricing and is not

10

sacrificing price to increase near-term volumes. Equinix price points remain at a 20-40% premium to its peers due to its high power densities and best in class data

11

centers. We expect a 3-5% boost to annual revenue from price increases.

12

Id.

13

70. On April 22, 2010, Jefferies & Company issued a report entitled “Better Than

14

1 Expected Q1:10 Results; Outlook Largely In Line.” Ex. Q. The report’s “Investment Summary”

15

1 stated: “EQIX easily beat consensus revs and EBITDA, on the back of steady cabinet additions and

16

1 strong pricing trends .” Id.

17

71. On April 22, 2010, Brigantine Advisors issued a report entitled “EQIX moving to

18

I dominate local data connectivity, Internet access.” Ex. R. The report’s “Summary” stated: “ With

19

rates remaining stable , as well as solid interconnection growth in the quarter, we believe

20

I Equinix remains on track to continue its market share lead in the collocation sector.” Id. at 2.

21

72. On April 22, 2010, Oppenheimer issued a report entitled “Equinix Inc. Reports Solid

22

I 1Q Results; Mixed Operating Metrics.” Ex. S. The report’s “Summary” stated: “Management was

23

very upbeat on bookings, which remained solid across all regions (with particular strength in

24

financial and network services), and pricing trends remained firm .” Id. The report continued,

25

“Profitability also topped our forecast once more, as sustained cost discipline, better than expected

26

top-line performance, GM upside, and firm pricing trends drove upside .” Id. at 2. “On the whole,”

27

the report concluded, “we believe the business continues to exhibit solid momentum, as stable

28


trends and healthy new bookings will continue to drive upside on the top and bottom lines.” 1 pricing

2 Id. at 3.

3

C.

4

After Long Department of Justice Antitrust Inquiry, Equinix Closes Switch & Data Acquisition; “Pricing Leverage” Is Key to Acquisition’s Upside

5

73

On May 3, 2010, Equinix issued a press release announcing the completion of its

6

$683.4 million acquisition of Switch & Data. Ex. T. The price included a cash payment of $134

7

I million and the issuance of approximately 5.5 million shares of Equinix common stock, valued at

8

$549.4 million based on the closing price of the Company’s stock on April 30, 2010. Id.

9

74. Defendants promised to drive an aggressive integration schedule towards a one-

10

company model, beginning with a strong focus on integrating the sales forces by getting them to

11

cross-sell ( i.e. , to have former Switch & Data sales representatives selling into Equinix assets, and

12

longstanding Equinix sales representatives selling into former Switch & Data assets). Defendants

13

also boasted that the transaction would further elevate Equinix above its competition, establishing it

14

as the premier North American and worldwide network neutral data center provider.

15

75. On May 7, 2010, Equinix hosted a conference call to discuss the Switch & Data

16

1 acquisition. Ex. U. On the call, Smith discussed the details of the acquisition and described

17

expectations for the combined Company, including both cost and revenue synergies “on virtually

18

every line of the P&L”:

19

[SMITH:] [T]his transaction continues to distance Equinix from other data center providers, and further establishes us as the only global network neutral data center

20

provider, and clearly with the largest North American footprint.

21 * * *

22

On the financial side of the equation as we previously stated, we expect a benefit from synergies on virtually every line of the P&L . . . .

23 * * *

24 Let me switch gears and give you an update on our plans for integrating

25

Switch & Data into Equinix. . . .

26

Our overriding goal [is] to drive an aggressive integration schedule to move towards a one company model, with full annualized synergies to be realized no later

27

than mid-2011. We have integrated Switch & Data under Pete Ferris, the President of our North American region. . . .

28


1

Secondly, we will drive top-line growth with a strong focus on achieving revenue synergies across both sales organizations. An early sign of success over the

2

past week is that we have already identified several Equinix customers that are interested in the Switch & Data inventory . . . .

3 Third, we intend to build one integrated team that will leverage the strength

4

of both Companies. . . . We have already realigned the organizations, rebranded the data centers, and started the journey to integrate their systems and processes onto the

5

Equinix platform.

6 * * *

7

[SMITH:] As soon as we get these sales organizations integrated and cross-selling , and understand the capacity on both sides, we are going to go hard at revenue

8

synergies.

9 I Id. at 4, 14.

10

76. Analysts not only remarked favorably on the Company’s ability to successfully

11

1 integrate Switch & Data, but also noted that the acquisition reinforced the Company’s already

12

I dominant pricing power. Analysts viewed pricing leverage as a key motivator for and positive

13

1 outcome of the acquisition, and noted that the Company’s dominant position would be extended

14

even further, allowing it to retain its pricing power and premium over competitors for at least the

15

next two years.

16

77. On May 7, 2010, J.P. Morgan North America Equity Research (“J.P. Morgan”) issued

17

1 a report entitled “Equinix: Resuming Coverage with Overweight Rating and $130 Price Target.” Ex.

18

V. Regarding the merger, the report stated: “We believe the acquired assets enhance the company’s

19

already strong position as a leader in the data center market. We believe data center fundamentals

20

remain very healthy, driven by strong demand and stable pricing .” Id.

21

78. On May 7, 2010, Merriman Curhan Ford issued a report entitled “Strategic and

22

1 Financial Benefits of the Switch and Data Acquisition Should Boost Growth in 2011 and Expand

23

Valuation Multiples.” Ex. W. Among “the key strategic and financial reasons for the

24

acquisition ,” the report cited “pricing leverage .” Id.

25

79. On May 10, 2010, Oppenheimer issued a report entitled “Equinix Inc.: Raising

26

1 Estimates for SDXC Acquisition.” Ex. X. The report stated: “The resulting increased scale and

27

dominant market position should allow EQIX to sustain its competitive advantage and pricing

28

for at least the next two years .” Id.


1

80. On May 12, 2010, RBC Capital Markets (“RBC Capital”) issued a report entitled

2

1 “Equinix, Inc. (NASDAQ: EQIX): Updating Estimates; Outperform Rated.” Ex. Y. The report

3

I stated: “Our recent research amongst Equinix’ competitors and customers suggests a strong demand

4

I pipeline and robust pricing across multiple sizes , types of customer segments, and regions, and we

5

I believe Equinix is able to effectively leverage its brand and multi-region presence to win customers.”

6

Id.

7

81. By May 13, 2010, Equinix stock price had shot up to $101.68 per share, from $91.45

8

1 in the wake of the Company’s May 7, 2010 conference call regarding the merger.

9

82. On May 18, 2010, Deutsche Bank issued a report entitled “Hub of the Internet;

10

1 Initiate with a Buy and $120 target.” Ex. Z. The report stated: “[W]e think there are strategic

11

benefits to consolidating the market both from a scale and from a pricing perspective.” Id. at 4. It

12

continued: “In our view, the acquisition of Switch & Data is a smart strategic acquisition that adds

13

much needed colocation inventory and likely helps maintain a favorable pricing environmentfor

14

longer .” Id. at 13.

15

83. On May 26, 2010, William Blair & Company (“William Blair”) issued a report

16

1 entitled “Initiating Coverage With a Market Perform Rating.” Ex. AA. The report stated: “Despite

17

the ubiquitous presence of competition, robust demand has resulted in stable pricing and capacity

18

shortages in numerous markets. This shortage of capacity is expected to persist.” Id. at 8

19

84. On June 8, 2010, Cowen & Company issued a report entitled “Quick Take: Recent

20

1 Stock Action Unwarranted; Reiterate Outperform.” Ex. BB. The report stated: “Checks with the

21

company as well as our industry sources continue to suggest there has been little fundamental change

22

in pricing or demand across all three regions while recent conversations with several investors have

23

uncovered no new concerns.” Id.

24

85. On June 10, 2010, Oppenheimer issued a report entitled “Equinix Inc.: Adjusting

25

1 Estimates for FX Headwinds.” Ex. CC. The report stated: “Positively, underlying fundamentals in

26

the colo market remain healthy . . . . Given EQIX’s dominant position in the market, we believe the

27

company will be able to sustain its competitive advantage and pricing power for at least the next

28

two years .” Id. The report continued: “ We believe that the increased scale and dominant market


1

of the combined entity should allow EQIX to sustain significant pricing power for at least

2 1 the next two years .” Id. at 3.

3

86. On June 21, 2010, RBC Capital issued a report entitled “Equinix, Inc. (NASDAQ:

4

1 EQIX): Reiterated Outperform; Operating Trends Appear Solid, FX Pressures Narrowing.” Ex. DD.

5

The report stated: “On the pricing front, we have seen evidence of increased cabinet and interconnect

6

I pricing to some US customers, and see the potential to continue to drive price increases to

7

segments of the acquired Switch & Data customer base upon contract renewal.” Id.

8

87. On July 19, 2010, Brigantine Advisors issued a report entitled “Equinix, Inc.: Buy: 2

9

1 months of Switch and Data integration in focus.” Ex. EE. The report stated:

10

Our thesis for EQIX remains: the company dominates local cross-connection services in the six major US connectivity cities, and provides critical access from those

11

facilities to the Internet. With the purchase of Switch and Data, there are few companies with the scope of facilities to challenge EQIX, and the company should

12

be able to maintain premium pricing .

13

Id. at 2.

14

88. On July 23, 2010, SunTrust issued a report entitled “2Q10 Preview; Expecting Stable

15

1 Operating Metrics but FX Headwinds.” Ex. FF. The report stated: “Recent customer channel

16

I checks indicate demand remains strong and pricing is firm .” Id. It continued: “ [C]onsolidation

17

1 [with Switch & Data] improves the pricing environment and should reduce new EQIX capacity

18

1 plans.” Id. at 2.

19

89. On July 26, 2010, Morgan Joseph issued a report entitled “Colocation and Switch and

20

1 Data Revenue Should Drive 2Q10 Sales Growth; Buy.” Ex. GG. The report stated: “We believe

21

June quarter sales should continue to be driven by Colocation revenue given strong demand and

22

stable pricing, as well as the contribution from the recent Switch and Data acquisition.” Id.

23

90. On July 28, 2010, Guggenheim issued a report entitled “Equinix Inc.: EQIX – BUY –

24

I 2Q10 Earnings Preview.” Ex. HH. The report stated: “Our customer and channel checks continue to

25

paint a solid picture of demand for Equinix. We believe that relative pricing weakness at SAVVIS

26 . . . has benefited Equinix , and overall the industry demand versus supply ratio remains at or near

27

3x.” Id.

28


1 D. In Advance of the 2Q09 Financial Results and Conference Call, Analysts Signaled that Two of Investors’ Most Pressing Concerns

2

Were Pricing Stability and Sales Force Integration

3 91

In anticipation of the Company’s 2Q10 financial results and the conference call to

4

I follow, analysts told the Company what topics investors wanted addressed. Foremost among them

5

1 was the Company’s ability to maintain its pricing power, particularly in light of the announcement

6

1 by a competitor, SAVVIS, Inc., that its customers were seeking 5% discounts

Due to the

7

I importance of the Company’s pricing power and its premium service offering, the news that its

8

competitors were feeling pressure to offer discounts was disconcerting. The effects of competitor

9

discounts and ever-increasing competition were investors’ paramount concerns.

10

92. On July 22, 2010, Morgan Stanley published a report entitled “2Q10 Preview: FX

11

1 Poses Risk to Top-line Guidance, Capex Likely Still Elevated.” Ex. II. The report raised concern

12

regarding SAVVIS’s recent announcement of 5% discounts, and wanted to know whether Equinix

13

was facing the same pressure: “ 2010 Outlook / Economy – . . . SAVVIS recently mentioned that

14

customers were looking for ~5% cost savings on colocation contract renewals. How many deals

15

are being escalated to management on price? ” Id. at 5.

16

93. On pricing more generally, Morgan Stanley wanted to know whether the Company

17

I could continue to maintain price increases and premium pricing in the current environment.

18

Pricing – On the 1Q10 call, management said that pricing was holding “steady .” What regions and markets are seeing the most favorable pricing

19

environments? To what extent are cross connects and additional power usage contributing to price increases? Are 3-5% annual increases still reflective of the

20

current environment? Has the 20-40% pricing premium relative to the peer group changed since the start of the year? Are there any new entrants that have put

21

pressure on pricing in some markets? How is management prioritizing higher prices in the short term versus contract extension?

22 Id.

23 94. On July 23, 2010, SunTrust issued a report entitled “2Q10 Preview; Expecting Stable

24 Operating Metrics but FX Headwinds.” Ex. FF. The report stated: “Questions will likely focus on

25 . . . industry capacity and pricing.” Id.

26 95. In addition to concerns about pricing and discounts, investors also wanted the

27 Company to address the status of the Switch & Data integration. Specifically, analysts wanted to

28


1

I know about the progress of the “Equinization” process of the former Switch & Data assets and

2

I culture, and to gain insight into how many cross-selling deals had occurred. The answers to these

3

I questions would reveal whether analysts had been correct to laud the Company’s ability to manage

4

1 the acquisition and whether the Company’s strategy for integrating the sales forces had begun to

5

1 come to fruition.

6

96. On July 22, 2010, Morgan Stanley published a report entitled “2Q10 Preview: FX

7

1 Poses Risk to Top-line Guidance, Capex Likely Still Elevated.” Ex. II. The report wanted to know

8

how far the “Equinization” process of Switch & Data had progressed and “[h]ow many cross-selling

9

deals ha[d] occurred”:

10

Synergies – Management has guided for realizing the full run-rate in mid- 2011. How far along is the “Equinization” process? Are there other specific

11

synergy targets that the company can share? How many incremental cross-selling deals have occurred?

12 Id. at 5.

13 97. On July 23, 2010, SunTrust issued a report entitled “2Q10 Preview; Expecting Stable

14 Operating Metrics but FX Headwinds.” Ex. FF. The report stated: “Questions will likely focus on

15 synergy expectations associated with the SDXC combination.” Id. at 2.

16 98. Defendants discussed in detail, and made false statements and material

17 misrepresentations concerning, the Company’s pricing power and the Switch & Data integration

18 during the Company’s July 28, 2010, 2Q10 conference call as well as at later times during the Class

19 Period. Ex. JJ.

20 99. Prior to, during, and after the Class Period, analysts focused consistently on the

21 Company’s pricing power as the key metric that set Equinix apart from its competitors. The

22 Company priced its services at 20-40% more than its peers and analysts reiterated the importance of

23 its pricing strength and stability even more frequently than the Company boasted about it. Notably,

24 in response to SAVVIS’ statement that it had issued 5% price discounts on contract renewals,

25 Equinix took the opportunity to reiterate its pricing strength, assuring investors that pricing was as it

26 had always been – firm and disciplined – and that the Company was willing to walk away where

27 pricing pressure from competitors existed.

28


100. But Defendants knew that the Class Period statements were false and misleading. In

1 fact, Defendants admitted on October 5, 2010 that by July 20, 2010 they were aware of “a number

I of” discounts offered to customers before and during the Class Period, including two of more than

10% that their 3Q10 and FY10 guidance failed to account for. Moreover, Defendants also knew that

I their salespeople were empowered to offer discounts of up to 10%, that supervisors were empowered

to approve discounts of up to 30%, and discounts greater than 30% were given – discounts many

multiples greater than the 5% discounts offered by SAVVIS just prior to the Class Period that had

led to analyst concern. And Defendants knew that the sales force integration was not complete, and

the cross-selling strategy at the heart of the integration was a failure.

VII. FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD6

A. July 28, 2010 False and Misleading Statements

101

On July 28, 2010, Equinix issued a press release announcing its 2Q10 financial

results. Ex. KK. The Company reported a net loss of $2.3 million, or $0.05 diluted earnings per

share (“EPS”), and revenue of $296.1 million, which included $37.6 million in revenue from Switch

& Data for the quarter. Id. Additionally, the Company issued revenue guidance of $335 to $338

million for 3Q10 and guidance of $1.225 to $1.235 billion for the FY10. Id. The Company also

noted specifically that the Switch & Data integration was “ahead of schedule.” The release stated in

part: “The integration of Switch and Data is ahead of schedule, and our expansions are providing us

much needed capacity in many of our key markets, which positions us well for further growth.” 7 Id.

1. False and Misleading Statement: Sales Force Integration

102. On the same day, Equinix hosted a conference call with investors, media

representatives, and analysts. During the call, defendants raved about the integration of Switch &

Data into Equinix, stating that Equinix had established a strong foundation for driving revenue

6 The false and misleading statements below are highlighted in bold and italics.

7 Plaintiffs do not allege that the financial results or revenue guidance were false; rather, they are presented to provide context for the false and misleading statements Defendants made during the conference call.

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1 across the integrated platform. In addition to stating that cost synergies would be achieved even

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sooner than first stated, Smith announced: “ The sales organizations have been completely

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1 integrated with full cost synergies already achieved in the sales function .” Ex. JJ at 5. Taylor

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1 continued, “ the organization is completely finished in sales .” Id. at 14.

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[SMITH:] I’d like to review our progress with the Switch and Data integration. As I mentioned earlier we are ahead of schedule and have been able to accelerate the

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timing to realize the initial cost synergies for 2010. Overall the integration is proceeding very well . . . . We are on track to achieve the $20 million cost synergies

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previously outlined and have moved aggressively towards this goal. . . .

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Shifting gears to revenue synergies, we’ve established a strong foundation for driving revenue across the integrated platform. . . . The sales organizations have

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been completely integrated with full cost synergies already achieved in the sales function. So we now have the sales teams focused on revenue synergies by driving

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bookings and growing key accounts.

11 * * *

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[TAYLOR:] We’ve got the sales forces cross-selling into both assets. They’re all part of one team today, the organization is completely finished in sales, so the

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structure all the way up to the sales leader in North America has been in place for weeks now .

14 Id. at 5, 14.

15 2. False and Misleading Statement: Pricing Power

16 103. During the call, defendants reinforced repeatedly that pricing remained firm. During

17 prepared remarks at the beginning of the call, Taylor stated: “ Overall North America pricing

18 remains firm across both the organic and the Switch and Data footprint .” Id. at 4.

19 104. During the question and answer session, analysts questioned Equinix’s confidence in

20 the Company’s ability to maintain firm pricing in the face of an increasingly competitive

21 environment, especially since key competitors were disclosing pricing pressures in the industry.

22 Given SAVVIS’ announcement of 5% discounts, analysts, expressed concern regarding whether

23 Equinix could maintain its premium pricing.

24 105. Defendant Smith answered their concern by reassuring investors that the pricing

25 pressure was “not terribly different” than any Equinix had faced before, and that while the Company

26 might experience pricing pressure in some markets, namely Los Angeles, California, the Company

27 sales force would remain “very, very disciplined on price .” Id. at 9.

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[ANALYST:] I’m wondering how you might characterize the competitive environment in terms of pricing behavior by your peers and particularly in markets or regions where there’s a lot of supply coming online? . . .

[SMITH:] . . . On the competitive front it does vary by metro, by market. I would tell you in the US the statement you made is we’re seeing a little bit of that in the LA market. And I think because of the demand – or the competitive supply that we see in Phoenix and Vegas and also in the LA market, so there are certain markets where certain pressure – pricing pressure and pricing behaviors are going to change, but that’s not terribly different than what we’ve experienced over several quarters. And so in certain markets we’re going to get some pricing pressure on certain deals. If it’s a strategic deal and it’s a magnetic deal for us, we’ll get more aggressive. If it’s not, we’re going to let it go and whether it goes to a competitive retail or a wholesale business, so be it. We’re maintaining the discipline on the floors and ceilings we have on our pricing and the sales force is staying very, very disciplined on price .

Id. at 7-9.

3. False and Misleading Statement: Pricing

106. In addition, Defendants sought to comfort analysts and investors who had expressed

concern that the more competitive landscape would force the Company to offer more discounts.

Smith reassured investors that “ lots of times [we] walk away ” from pressure to offer discounts .

[ANALYST:] [Y]ou highlighted during your comments that at certain deal sizes in terms of megawatts that it was a more competitive landscape and sometimes you were walking [a]way from those transactions. . . .

[SMITH:] . . . So we see in some deals we see them coming down into the 250, 300 KW range, below that half a megawatt range, so there’s – I wouldn’t say it’s across the board trend, but we’re starting to see them dip into little bit smaller deals. So, yes there’s pricing pressure there and yes we lots of times walk away with it if it’s a strategic customer we might get a little more aggressive . Are we thinking about figuring out how to get into that space today, no, we don’t really need to .

Id. at 16.

4. Investor Reaction to the July 28, 2010 Statements Demonstrates the Materiality and Significance of the Company’s Pricing Discipline and the Integration of Switch & Data

107. The Company’s false and misleading statements reinforced investors’ deeply-held

impression of the Company’s pricing power as its core strength and their belief that the the Switch &

Data integration was proceeding faster and more successfully than expected.


108. Regarding pricing, analysts commented that: “pricing is holding firm despite the large

amount of capacity coming online”; “demand remains solid and pricing is firm”; “EQIX stressed that

1 they continue to see a positive pricing environment”; “EQIX will bid on larger deals but often walks

I away in many cases”; “increased scale leaves EQIX in a dominant market position and should aid

I pricing power”; “there has been no evidence that positive demand and pricing trends have changed”;

1 and “due to firm pricing and strong demand, EQIX will likely continue to exceed its financial

guidance for the balance of 2010.” See ¶¶110-119.

109. And regarding integration, analysts commented that: “The sales organizations have

I been trained to market and distribute each other’s product sets”; “[c]ommentary was positive

surrounding the Switch and Data integration”; “[f]aster-than-expected realization of SDXC cost

synergies should generate margin upside in 4Q10/FY11, and, importantly, management cites early

successes integrating the sales force and generating cross-selling revenue synergies”; “[t]he company

also indicated that the integration of Switch and Data was ahead of plan”; “commentary on the

integration of Switch and Data [] indicates the integration is progressing well”; and “[w]e also note

that the sales team has been fully integrated for several weeks.” See ¶¶110-119.

110. On July 28, 2010, William Blair issued a report entitled “EBITDA Outlook Raised on

1 Better-Than-Expected Switch and Data Synergies.” Ex. LL. In the report, William Blair stated:

After the markets closed Wednesday, Equinix reported second-quarter results, with in-line revenue and EBITDA above estimates. Commentary was positive surrounding the Switch and Data integration and pricing is holding firm despite the large amount of capacity coming online throughout the industry.

* * *

The sales organizations have been trained to market and distribute each other’s product sets . . . .

* * *

Changes to Estimates: Based on continued stable pricing, our expectation for a smooth Switch and Data integration, and the continuation of healthy demand, we are revising our estimates.

Id.

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111. The report continued: “Commentary was positive surrounding the Switch and Data

1 integration and pricing is holding firm despite the large amount of capacity coming online

1 throughout the industry.” Id. It stated further that the Company experienced “stable pricing in the

I key markets of all three continents.” Id. “Based on continued stable pricing, our expectation for a

1 smooth Switch and Data integration, and the continuation of healthy demand,” William Blair &

I Company revised upwards is prior estimates. Id.

112. On July 28, 2010, SunTrust issued a report entitled “Equinix 2Q10 Earnings First

1 Look – Steady As She Goes.” Ex. MM. The report cited the Company’s continued firm pricing: “In

addition to positive benefits of the Switch & Data acquisition, we see several key trends that should

continue to drive organic growth in 2H10. Recent customer channel checks indicate demand

remains solid and pricing is firm.” Id. at 4.

113. On July 29, 2010, Deutsche Bank issued a report entitled “Solid quarter should help

ease concerns.” Ex. NN. The report summarized: “Equinix’s 2Q’10 results were solid as bookings

were better than expected in every region, synergies with Switch & Data are ahead of plan and

pricing trends remain firm.” Id. More specifically, the report stated: “Pricing remains firm with

MRR per cabinet up 8% y/y in the U.S. Switch synergies are ahead of plan and was the main reason

for increased EBITDA guidance.” Id.

114. On July 29, 2010, Wells Fargo issued a report entitled “EQIX: Better Than Expected

1 Q2 Results – Reit OUTPERFORM.” Ex. OO. In the report, Wells Fargo restated the point made by

defendants that the Company would walk away from deals in markets where pricing pressure was

significant:

RETAIL PRICING STABLE BUT PRESSURE FOR LARGER DEALS. EQIX stressed that they continue to see a positive pricing environment for retail colocation – which includes smaller and mid sized deal in the 10-20 cabinet range. . . . EQIX will bid on larger deals but often walks away in many cases in these markets – letting the more traditional wholesale providers win the new business.

Id. at 3.

115. On July 29, 2010, Oppenheimer issued a report entitled “Upgrading to Outperform;

1 Top-Line Positioned for Healthy Growth.” Ex. PP. The report emphasized points made by

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defendants during the conference call, in particular that pricing was stable and was expected to

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1 remain stable, and that the synergies derived from Switch & Data would generate upside faster than

3 expected.

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We are upgrading EQIX shares to Outperform from Perform and establishing

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a $115 PT. Our more constructive stance on EQIX shares is predicated on the following considerations: 1) improving visibility into 2H10/2011 growth trajectory with close of SDXC acquisition; 2) faster-than-expected realization of synergy benefits, generating margin expansion in 4Q10 and beyond; 3) increased scale leaves EQIX in a dominant market position and should aid pricing power; 4) underlying colo market demand/supply fundamentals remain relatively healthy . . . .

. . . The resulting increased scale and dominant market position should allow EQIX to sustain its competitive advantage and pricing power for at least the next two years.

Faster-than-expected realization of SDXC cost synergies should generate margin upside in 4Q10/FY11, and, importantly, management cites early successes integrating the sales force and generating cross-selling revenue synergies. We see potential for further revenue upside related to synergies over the next several quarters.

* * *

. . . EQIX also enjoys high visibility (90%+ recurring revenues) . . . .

116. On July 29, 2010, Cowen & Company issued a report entitled “Solid 2Q10 Results

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and 2010 Guidance.” Ex. QQ. In the “Conclusion,” the report stated:

During the quarter the company continued to benefit from strong demand which was evident in (1) strong cabinet adds, (2) strong gross bookings, and (3) stable pricing, across all regions. The company also indicated that the integration of Switch and Data was ahead of plan. We view results as positive . . . .

Id. The report also dismissed investors’ concerns about the Company’s ability to maintain pricing

power: “While we acknowledge the quantity of concerns alone . . . there has been no evidence that

positive demand and pricing trends have changed.” Id. at 2.

117. On July 29, 2010, Brigantine Advisors issued a report entitled “Equinix, Inc.: Buy

(EQIX, $88.06): Record bookings, synergies drive Q2.” Ex. RR. The report cited the “pricing

1 power” provided by the Switch & Data acquisition and lauded the “ahead of schedule” integration:

“[T]he acquisition of Switch and Data on April 30th . . . eased capacity constraints and allowed for

strong pricing power. . . . The acquisition of Switch and Data is ahead of schedule.” Id. The report


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1 also stated that “commentary on the integration of Switch and Data . . . indicates the integration is

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1 progressing well.” Id. at 2. The report concluded: “With the purchase of Switch and Data, there are

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1 few companies with the scope of facilities to challenge EQIX, and the company should be able to

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1 maintain premium pricing.” Id.

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118. On July 29, 2010, Morgan Joseph issued a report entitled “2Q10 Adjusted EBITDA

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1 Beats, Switch and Data Integration Progressing; Buy.” Ex. SS. The report cited the Company’s

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statement that the sales team was already integrated: “We also note that the sales team has been fully

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integrated for several weeks and we expect cross regional sales flow from Switch and Data

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customers to increase.” Id.

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119. On July 29, 2010, Guggenheim issued a report entitled “EQIX – BUY – 2Q10 Results

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1 Exceed Expectations; Maintaining Buy Rating and $108 PT.” Ex. TT. The report cited confidence

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that, “due to firm pricing and strong demand, EQIX will likely continue to exceed its financial

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guidance for the balance of 2010.” Id.

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120. After the Company’s July 28, 2010 announcement of its 2Q10 results and forecast for

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1 3Q10 and FY10, the Company’s share price rose from a close of $88.06 on July 28, 2010 to a close

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of $93.82 on July 29, 2010. By September 15, 2010, the Company’s stock price had reached $95.73

17 – up $7.67 from July 28, 2010.

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5. Reasons Why the Pricing Power Statements in ¶¶103-106 Were False and Misleading

19 121. Defendants painted a false and misleading picture of the Company. That picture,

20 which had emerged and consolidated over numerous quarters, was one of a Company whose

21 premium offering enabled it to price at a premium to its competitors, a Company that could avoid

22 large discounts like the 5% discounts announced by SAVVIS, and a Company that could withstand

23 and rise above increasing competition in the market due not only to those factors but also to its

24 successful integration of Switch & Data.

25 122. Defendants knew or recklessly disregarded that Equinix was not, in fact, “maintaining

26 the discipline” or “staying very, very disciplined on price,” and that the Company was being far

27 more than merely “a little more aggressive” on price. ¶¶105-106. Specifically, while defendants

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to disclose that, as they would later admit on October 5, 2010, they knew before July 28, 2010 that

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I the Company had already issued discounts to “a number of” customers, including discounts of at

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1 least 10% to at least two customers. Ex. UU at 3. This was higher than the 5% discounts issued by

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1 SAVVIS that had sparked concern over the potential deterioration of the Company’s pricing power

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1 and discipline, which Defendants denied. In addition, Defendants failed to disclose that, as they later

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admitted on October 5, 2010, the Company had already departed from what it called its “historic[]”

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commitment not to trade volume for price even before July 28, 2010. Id. ; ¶153.

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123. The knowing falsity of Defendants’ statements regarding the Company’s pricing

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I power is reinforced by the accounts provided by former employees. According to these former

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employees, during the Class Period Equinix was “very aggressive with its pricing” and would price

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deals at the price needed to close them – including providing discounts greater than 30%. Equinix

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executives did not want to be brought potential deals unless they would definitely close, so discounts

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were widely offered with little oversight.

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124. According to FE5, a former Equinix Regional Director, Equinix made extensive use

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1 of discounts in implementing its pricing strategy prior to and during the Class Period. In her role as

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Regional Director, FE5 was responsible for reviewing and approving discounts of between 10-30%.

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She reported that at the end of each quarter Equinix became “very aggressive with its pricing,” and

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she regularly approved discounts between 10-30%.

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125. In fact, it was not uncommon for discounts to rise above 30% with the approval of the

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1 Finance Director Brock Bryan, according to FE5. Moreover, FE5 reported that, prior to and during

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the Class Period, Equinix sales reps themselves were empowered to offer a customer up to a 10%

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discount without any supervisory or managerial approval. FE5 and FE2, an Equinix sales

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representative, reported that the size and frequency of discounts accelerated towards quarter’s end.

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126. In addition, FE5 reported that Equinix also discounted installation charges prior to

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I and during the Class Period. According to FE5, non-MRR revenues were as important to Equinix as

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MRR revenues; usually there was a 1:1 ratio between them. Towards the end of each quarter, FE5

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1 reported that installation charges would often be waived in their entirety so that the Company could

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1 meet projections.

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6. Reasons Why the Sales Force Integration Statements in ¶102 Were False and Misleading

4 127. Defendants’ false picture also purported to show a Company that was managing the

5 Switch & Data acquisition so successfully that it was ahead of schedule, a Company that had

6 completely integrated the former Switch & Data sales force, and a Company where cross-selling

7 between the Equinix and Switch & Data assets was driving the Company forward. The true facts

8 were quite different.

9 128. Defendants knew or recklessly disregarded that the statements that the integration of

10 Switch & Data was “ahead of schedule,” and that the sales forces were “completely integrated” and

11 “completely finished,” were false. ¶102. Specifically, Defendants knew or recklessly disregarded

12 that, as they admitted on October 5, 2010, they “still ha[d] work to do” to integrate the sales forces.

13 ¶148.

14 129. According to FE3, a former senior marketing manager, the attempted integration of

15 the sales forces was achieved by shifting accounts away from former Switch & Data representatives

16 and giving them to longstanding Equinix representatives. She reported that there was apparently no

17 consideration by Equinix of the sales representative most likely to win the deal.

18 130. According to FE2 and FE4, though the former Switch & Data sales representatives

19 were far more knowledgeable about how to sell space in the former Switch & Data sales centers,

20 these accounts were given to longstanding Equinix sales representatives. FE3 reported that the news

21 that accounts were being transitioned from former Switch & Data representatives to longstanding

22 Equinix representatives spread like wildfire among the former Switch & Data representatives, who,

23 in response, concealed their pipelines of potential deals from Equinix management.

24 131. FE3 also described the “cross-selling” strategy touted by Equinix (¶102) as a hoax

25 and stated that it became clear immediately to the former Switch & Data representatives that they

26 were being shortchanged when they were accompanied on their sales calls by longstanding Equinix

27 representatives. As a result, FE1 stated that the former Switch & Data sales representatives stopped

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I pursuing renewals and new sales because they did not want to lose the sale (and corresponding

I commission) to a longstanding Equinix sales representative.

132. Moreover, according to FE1, Equinix management was fully aware of the failure of

its cross-selling strategy. FE1 reported that she and her team were responsible for tracking cross-

selling in weekly reports that detailed the progress of sales, the dollar amounts of missed

I opportunities, and a notes section where sales staff could indicate the reasons why deals were not

1 closing. 8

133. FE1 reported that the cross-selling deals were not closing and she and her team

1 personally called the former Switch & Data and longstanding Equinix sales representatives to find

out why. FE1 reported that the former Switch & Data sales representatives told her and her team

that their efforts to assist the longstanding Equinix sales representatives were rejected. According to

FE1, she and her team entered those remarks as quotes in the weekly cross-selling reports. FE1

reported that the weekly reports showed that the Company missed sales opportunities that would

have resulted in millions of dollars of additional revenues. The reports were distributed to, among

others, Vice President of Sales Operations Carmella Weatherill and Director of Sales Effectiveness

Martin Jojarth. FE1 also reported her understanding that Weatherill shared the cross-selling reports

with Senior Vice President of Sales Dan Walker.

B. False and Misleading Statements to RBC Capital Around September 1, 2010

134. Despite the truth known to, or recklessly disregarded by, Defendants, they continued

to boast about the Company’s pricing strength and integration success later in the Class Period. As

such, in their public statements, Defendants continued to falsely state that pricing was stable (and

was even increasing in some areas), that competition was having no effect on pricing and discounts,

and that the Switch & Data integration was well in hand and ahead of schedule.

8 FE1 did not recall the exact title of these reports. She referred to them as cross-selling reports.

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1. False and Misleading Statements: Pricing Power and Sales Force Integration

135. False and Misleading Statement: On September 1, 2010, RBC Capital issued a report

entitled “Recent Meeting with Equinix Management.” Ex. VV. The report recounted an in-person

meeting with defendant Taylor during which RBC Capital asked Taylor questions about demand,

pricing and competition, among other things. According to RBC Capital, Taylor stated the

Company’s pricing remained steady and that pricing remained stable:

We recently met with Equinix CFO Keith Taylor. Our discussion touched on the following topics:

* * *

Pricing: We believe pricing remains largely stable and note that list pricing in some product areas has increased this year . The company has adopted a tiered pricing offer at the acquired Switch & Data locations, consistent with prior management practices at that company.

Competition: When asked about competitive impacts from 1) cloud demand displacing colo demand and 2) wholesale operators moving toward smaller deal sizes; management appeared sanguine . Cloud hosting appears to be a greater source of colo demand at EQIX’s sites than a displacement threat, and wholesale competition does not hamper EQIX’s premium-targeted efforts.

. M&A: The company appears to have the Switch & Data integration process well in hand and ahead of schedule .

* * *

Overall, we believe pricing remains largely stable across most markets/datacenters, and note that list pricing in some product areas has increased this year (e.g., fiber cross connects) .

* * *

Meanwhile, wholesale operators’ increasing presence in smaller deals does not appear to be affecting Equinix’ overall pricing or ability to achieve sales targets. Even EQIX’s more competitive markets are selling well despite competition from operators with ample capacity in these or adjacent markets .

Id.


1

2. Reasons Why the Statements in ¶135 Were False and Misleading

2 136. Taylor’s statements, as recounted by RBC Capital, continued to perpetuate a false

3 picture of the Company. Investors, who had long ago seized on the Company’s pricing power and

4 ability to avoid large discounts in the face of competition as the Company’s core strength, were

5 further misled about the Company’s ability to continue those trends. And investors were again told

6 that the Switch & Data merger was ahead of schedule. But, as former employees and the Company’s

7 own October 5, 2010 admission reveal, the merger was not going smoothly, the sales forces were not

8 completely integrated, cross-selling was a total failure, and the Company was widely offering

9 discounts far in excess of those offered by SAVVIS (which had troubled investors).

10 137. While Taylor stated that “pricing largely stable” and that “pricing in some product

11 areas has increased this year,” he failed to disclose that pricing was not “stable” due to discounts

12 issued by the Company to “a number of” customers, including discounts of at least 10% to at least

13 two customers, and that the Company had varied from its “historic[]” commitment not to trade

14 volume for price. ¶¶148, 153.

15 138. Moreover, as the former employee accounts in ¶¶121-126 demonstrate, prior to and

16 during the Class Period Equinix sales representatives were authorized to – and did – provide

17 customers 10% discounts without needing to seek approval, and larger discounts, including

18 discounts greater than 30%, as well as up to 100% off installation fees. Simply put, pricing was not

19 “stable” and “Equinix’s overall pricing” was, contrary to the report, “affected”; Equinix was “very

20 aggressive with pricing.” (¶¶121-126 are incorporated herein in their entirety.)

21 139. Taylor knew or recklessly disregarded that the integration of Switch & Data was not

22 “well in hand” or “ahead of schedule.” Rather, Taylor knew or recklessly disregarded that there was

23 still considerable work to do to integrate the sales forces. ¶148. The former employee accounts in

24 ¶¶127-133 confirm the false and misleading nature of the statement. The cross-selling strategy key

25 to sales force integration was a “hoax” and Equinix senior management was receiving weekly

26 reports regarding lost deals resulting from the incomplete integration costing them millions of

27 dollars. (¶¶127-133 are incorporated herein in their entirety).

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C. September 15 and 22, 2010 False and Misleading Statements

2

1. False and Misleading Statements: Pricing Power and Sales Force Integration

3 140. In spite of what they knew or recklessly disregarded to be the true financial condition

4 of the Company, Defendants continued to present investors a false one. Defendants raved about the

5 health of the Company’s pipeline and the success of the cross-selling strategy, when the failed

6 integration of the Switch & Data sales force and the failure of the cross-selling strategy had

7 weakened the pipeline significantly and resulted in lost deals. Defendants again stated that they

8 would not trade price for volume when they had done precisely that, and would not damage their

9 pricing power when Defendants’ knew that they had issued numerous discounts to customers far

10 larger than SAVVIS’ 5% discounts that continued to worry analysts.

11 141. On September 15, 2010, defendant Taylor made a presentation at the Bank of

12 America Merrill Lynch Media, Communications & Entertainment Conference. During the

13 presentation, Taylor discussed the Company’s pipeline, good close rates, and purported success to

14 date in cross-selling Switch & Data and Equinix assets. In addition, Taylor reinforced comments he

15 and Smith made during the 2Q10 conference call, such as the Company’s thirty straight quarters of

16 revenue growth were a “strong proof point of the exceptional visibility we have.” Ex. JJ at 3.

17 Taylor boasted of the Company’s aptitude for forecasting accurately the Company’s financial

18 position. According to Taylor, the Company had a high degree of confidence in its ability to provide

19 guidance, maintain firm pricing and estimate the range of churn built into the Company’s business

20 plan. Moreover, Taylor maintained that pricing remained firm and that the Company would not

21 “trade price for volume.”

22 [TAYLOR:] [T]he pipeline’s as healthy as it’s ever been. Our close rates are

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good. We’re continuing to sell across our verticals, across our markets and certainly across our regions. And we’re cross-selling within the Switch and Data asset and

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the Equinix asset .

25 * * *

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I think as we look into 2011 on our Q3 earnings call, I think it’s fair to assume that we are going to give out guidance. We have a high degree of confidence in our

27

ability to do that .

28 * * *


[UNIDENTIFIED SPEAKER:] [H]ow do you think about that supply wave coming, its magnitude, its global scope, if there is one? And how you think about pricing and

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whether your customers are finally starting to say, “You know what? I’m not sure I want to sign a three or five year deal with 5% price escalators anymore, because

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three years from now there’s going to be 1 million square feet that I can choose from.” How do you get around – how do investors come to grips with that?

4 [TAYLOR:] . . . Look, we can win on price if we want to win on price. I

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think you’ve heard us say periodically we’re not going to trade price for volume .

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1 Ex. WW at 2-3, 9-10.

7

2. False and Misleading Statement: Pricing Power

8

142. One week later, on September 22, 2010, Taylor participated in a public conversation

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I presented at the Goldman Sachs Communicopia XIX Conference. During a question and answer

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session, Taylor reiterated that “pricing is stable, it’s firm.” Ex. XX at 9. While he hedged by stating

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that there are “some renewals that are very competitive,” Taylor gave assurance that Equinix is “not

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1 going to trade price for volume.” Id. at 9-10.

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[UNIDENTIFIED SPEAKER:] [I]f you could just kind of briefly give an overview of what you are seeing from a pricing environment, you know, both within the – per

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geography and then probably expand that into kind of on the contract renewal side whether or not we’re seeing any need to be discounting, given the competitive

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environment in certain markets.

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[TAYLOR:] Yes, I think in all three regions, and this is sort of a consistent message you’ve heard from us previously, that pricing is stable, it’s firm. It is at

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the price point that we would like to see as a company .

18 * * *

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We will be as aggressive as we need to be as a business. But we are not going to damage, if you will, the output because we think it is very important to

20

maintain pricing .

21

And the only other message point that I would give you is that we’ve been very clear with our sales organization that . . . we are not going to trade price for

22

volume. There’s deals that we want to do and there’s deals we want to win and go win those deals. But it’s easy to fill up a data center but it’s – I’m not so sure it is

23

easy to fill up at the right price. So by maintaining that discipline, I would give growth away to make sure we are very prudent on price .

24 Id.

25

26

27

28


1

3. Reasons Why Statements in ¶¶141-142 Were False and Misleading

2 143. By virtue of the facts alleged herein, it may be strongly inferred that Taylor knew or

3 recklessly disregarded that his September 15 and 22, 2010 statements were false and misleading for

4 reasons including the following:

5 144. Defendants knew or recklessly disregarded that the Company’s pipeline was not “as

6 healthy as it’s ever been.” Rather, as Former Employees reported, former Switch & Data

7 representatives kept secret their pipelines of potential deals and, as a result, the Equinix pipeline had

8 narrowed. See ¶130. Defendants also knew or recklessly disregarded that the Company was not

9 “cross-selling within the Switch and Data asset and the Equinix asset.” The reported cross selling

10 strategy was a “hoax,” and weekly reports showed that, as a result, the Company was losing deals .

11 See ¶¶131-133. (¶¶127-133 are incorporated herein in their entirety by reference.)

12 145. Defendants knew or recklessly disregarded that the Company’s pricing was not

13 “stable [or] firm,” and that the Company was already “trad[ing] price for volume.” Only a couple of

14 weeks later the Company would announce that it had issued discounts in 2Q10 to “a number of”

15 customers, including discounts of at least 10% to at least two of its biggest customers. ¶¶148, 153.

16 Moreover, defendants knew or recklessly disregarded that the Company had changed it’s historical

17 practice not to trade price for volume; in fact, it had been doing so for “magnets that we will go

18 after” and “get [thing] flexible in our pricing with” large customers willing to commit long-term by

19 aggressively adjusting prices for volume of “strategic customers.” See ¶¶153, 155. In addition,

20 according to the former employees, Equinix was “very aggressive with its pricing” – enabling sales

21 representatives to offer discounts of up to 10%, regularly approving discounts of greater than 30%,

22 and commonly waiving non-MRR fees entirely. (¶¶121-126 are incorporated herein in their entirety

23 by reference.)

24 146. Between September 15, 2010, and October 5, 2010, the Company’s stock price rose

25 further, from $95.73 to $105.09, culminating a Class Period rise of $17.03. But the stock lost $34.75

26 on October 6, 2010, the first available trading day after the truth about the Company’s false and

27 misleading statements was revealed.

28


VIII. THE TRUTH IS REVEALED

2

A. Equinix’s October 5, 2010 Press Release and Investor Conference Call

3

147. On the afternoon of October 5, 2010, Equinix issued a press release pre-announcing

4

1 that its 3Q10 financial results would miss the previously issued guidance. Ex. YY. The substance of

5

the Company’s October 5, 2010 disclosures amounted to admissions that Defendants knowingly or

6

I recklessly issued false and misleading statements concerning key issues that the Company had

7

I boasted of in the prior two-plus months, including the revenue and earnings forecasts for 3Q10 and

8

FY10 and the Company’s disciplined approach to pricing, which was expected to yield strong

9

1 financial results:

10

Equinix Revises 2010 Third Quarter and Fiscal Year Guidance

11

2010 Third Quarter and Full Year Guidance on Revenues Decreased; 2010 Third Quarter and Full Year Guidance on Adjusted EBITDA Increased

12 . . . Equinix, Inc. today announced it expects 2010 third quarter and full year

13

revenues will be below the Company’s previous outlook, and it expects 2010 third quarter and full year adjusted EBITDA will be above the Company’s previous

14

outlook, both provided on July 28, 2010.

15

Equinix now expects third quarter revenues to be in the range of $328.0 to $330.0 million, the midpoint of which is 2.2 percent lower than the midpoint of its

16

previous outlook, and total revenues for the full year to be approximately $1,215.0 million, which is 1.2 percent lower than the midpoint of its previous outlook. This

17

updated guidance is due to underestimated churn assumptions in Equinix’s forecast models in North America, greater than expected discounting to secure

18

longer term contract renewals and lower than expected revenues attributable to the Switch and Data business acquired in April 2010 .

19 Id.

20 148. Later that afternoon, Defendants held a conference call to explain the revised

21 guidance. During the call, the Company admitted that, at the time the 3Q10 forecasts were made on

22 July 28, 2010, it knew of, but failed to consider, discounts it had given to “a number of” customers.

23 In addition, Defendants admitted that the Company “still ha[d] work to do to realign the combined

24 sales organizations.” Ex. UU at 3.

25 [SMITH:] [D]uring the second and third quarters, there were certain discounts

26

and credit memos issued to a number of strategic customers in exchange for longer-term contracts . As we’ve discussed in the past, we have been incenting our

27

salesforce to extend the contract terms of magnet customers, though this can result in a price concession for some .

28


2

3

4

5

6

7

8

9 Id.

10

To put this into perspective, the estimated revenue impact from pricing concessions of the two largest deals in the past two quarters was less than $300,000 in MRR, but this enabled us to retain long-term relationships and total contract value in excess of $75 million as they ramp in over the next three years. The level of this repricing activity outpaced our guidance assumption.

Also contributing to this adjustment, revenues from our Switch and Data assets were lower than expected through the third quarter . We are five months into our integration plan, and we’ve been able to achieve cost synergy targets, resulting in a 7-point improvement to the Switch and Data adjusted EBITDA margins. We’re also starting to see the pipeline for these locations strengthen and convert into bookings, with several notable wins in the third quarter. We still have work to do to realign the combined sales organizations, but our expectations are that we will see improvement in the utilization of the former Switch and Data assets as we exit 2010 .

149. The statement “there were certain discounts and credit memos issued to a number of

11

strategic customers in exchange for longer-term contracts” contradicts Taylor’s Class Period

12

statements that “we’re not going to trade price for volume” (¶141) and “we’ve been very clear with

13

our sales organization that . . . we are not going to trade price for volume” (¶142).

14

150. The statement “We still have work to do to realign the combined sales organizations”

15

directly contradicted the earlier Class Period statements that “[t]he sales organizations have been

16

completely integrated” and “[t]hey’re all part of one team today, the organization is completely

17

finished in sales.” ¶102.

18

151. Analysts on the call were shocked by the disclosures, which shattered the picture the

19

I Company had painted of itself. Their concern was not the revised guidance, but rather the reasons

20

behind the revisions, primarily the significant weakening of the Company’s core attribute – its

21

pricing power – and the failure of the Company to adequately manage the Switch & Data

22

acquisition. As one analyst put it, the Company needed to talk investors, who were dumping stock

23

in reaction to the revelations, “back from the ledge”:

24

[ANALYST:] Obviously, look, the stock is down as much as $20 in the aftermarket. And what people are reading into this is that you’ve somehow mismanaged the

25

Switch and Data merger transaction, which people were afraid of; that prices are coming down in the industry faster than people thought ; and that[] now you’ve lost

26

your ability to forecast the Company based on not getting the numbers right from the last quarter.

27 So, can you kind of help us, kind of talk us back from the ledge a little bit

28

about what the specific magnitude of the exit rate from June was that you


misforecasted; how $300,000 in MRRs for these two very large deals was big enough to tilt the balance for guidance for an entire year? And then Switch and Data, I think

2

the theory was that there were no revenue synergies in the numbers. So what went wrong there that’s going to get fixed so that we can believe in the business model

3

again? Thanks.

4 * * *

5

[TAYLOR:] Our view today is that what I think about Switch and Data that it’s just – it’s slightly behind where we want it to be . But when you look at it

6

from a recurring revenue model perspective, it accumulates to something.

7 * * *

8

[T]he two deals that Steve had reference to represented a decision for us to go forward. As you know, on a semiannual basis, $300,000 translates into $2 million,

9

or $1.8 million, from basically July through December.

10

1 Ex. UU at 4-5.

11

152. Analysts continued to press the Company on pricing pressure. In response to

12

1 analysts’ questions, Smith admitted that the Company experienced pricing pressure at renewal time.

13

Smith also stated that “[t]his is not a new phenomenon for us,” but rather one that the Company had

14

faced for “many, many years,” rendering false and misleading the earlier statements that the

15

Company’s premium pricing was “firm” and “stable”:

16

[ANALYST:] So, where are you seeing some sort of pricing pressure where you feel that these customers are coming back to you and needing to see some

17

concessions? Is there some overcapacity in certain markets that’s driving this, or what is sort of the genesis for these customers in particular looking for these kind of

18

pricing concessions or threatening to leave the data centers?

19

[SMITH:] Well, it’s at – Frank, this is Steve. It’s at renewal time. And with our sweet spot being in that two- to three-year contract term, we do a fair amount

20

of renewals in North America. And what’s happening in some of these situations is that if a customer is getting much more educated about their architecture, about

21

what type of applications they have in our types of data centers versus a wholesaler type of data center, there is sometimes pressure on non-network-dense, non-

22

latency-dependent type applications. And they are getting, let’s call it more sophisticated about determining where they want to put that type of infrastructure .

23 Now, many of them will decide to keep it on a renewal with us because they

24

like the reliability, they like the brand, they like the Company, they like what we stand for. Other customers get to a situation where they determine they feel like they

25

can move a more back-office, a more server-farm-type application to a cheaper colo opportunity, and they are going to do that, or they are going to take it back in-house.

26 This is not a new phenomenon for us. We’ve been facing this for many,

27

many years. But I think what part of this is some of these credit and debit memos that Keith mentioned, we just didn’t get them included in the guidance

28


assumptions. And it was larger than we had expected or thought we’d experience in the amount of discounting that we’ve done to get longer-term contracts .

2 Id. at 6.

3

4 153. Answering another analyst’s question about pricing, Smith admitted that the

discounts represented a break from past practice, stating “[w]e historically have said that we will not

trade volume for price”: 6

[ANALYST:] I apologize; you said this at the very beginning, but I missed it. What

7

percent of the contract value does the $300,000 MRR represent? In other words, who is the concession here to get that contract? And how long – is this a new, extremely

8

long contract? Can you give us some more terms around that?

9 *

10

[SMITH:] So dealing with the two customers we referred to, again, I want you to know, number one, they’re strategic customers. We historically have said we

11

will not trade volume for price. But these are strategic magnets. There are magnets that we will go after, and we will adjust. In this case, it’s just over 10% is the effect

12

of the adjustment to their existing pricing .

13

Id. at 12.

14

154. The revelation that the Company would trade volume for price with strategic magnets

15

directly contradicted Taylor’s earlier Class Period statements that “we’re not going to trade price for

16

I volume” (¶141) and “we’ve been very clear with our sales organization that . . . we are not going to

17

1 trade price for volume” (¶142).

18

155. Pressed further on pricing, Smith revealed that the Company would affirmatively “get

19

1 flexible in our pricing with” large customers that were willing to commit long term. This contrasted

20

with the defendants’ earlier repeated statements that the Company has “maintained discipline” on

21

pricing and its assurance that it would “not trade price for volume”:

22

[ANALYST:] [W]hen I hear your comments about pricing, you are still indicating that the pricing in general is strong across most geographies, but there are a few

23

customers that we have to discount. Going forward, what gives you the confidence that the other customers might not come back to you and ask the same kind of

24

discounts? Thank you.

25 * * *

26

[SMITH:] [I]n terms of pricing, it is firm, as we’ve described it. And where we get pressure on pricing, if a large customer is willing to commit long term in large

27

volume, we are going to get flexible in our pricing with them .

28

Id. at 10.


1

156. The revelation that “if a large customer is willing to commit long term in large

2

1 volume, we are going to get flexible in our pricing with them” directly contradicted Taylor’s earlier

3

I class period statements that “we’re not going to trade price for volume” (¶141) and “we’ve been very

4

I clear with our sales organization that . . . we are not going to trade price for volume” (¶142). In

5

1 addition, the revelation that “we are going to get flexible in our pricing” also contrasted materially

6

I with Smith’s earlier statement that “there’s pricing pressure there and yes we lots of times walk

7

away with it if it’s a strategic customer we might get a little more aggressive.” ¶106. There is a

8

difference of magnitude between “we might get a little more aggressive” and “we are going to get

9

flexible,” especially when the latter is reinforced by the revelation, for the first time, of “a number

10

of” discounts, including discounts over 10%.

11

B. Investors React to the October 5, 2010 Disclosures and Equinix’s Stock Plummets

12 157. Investors rushed to sell Equinix stock, their illusions about the Company’s vaunted

13 pricing power – specifically its ability to compete without issuing large discounts – and the already-

14 completed integration of the sales forces shattered by the revelations that (a) the Company had been

15 issuing discounts to numerous customers since 2Q10 including some of more than double the 5%

16 discounts offered by SAVVIS that had concerned analysts before the Company’s July 28, 2010

17 conference call and (b) the Switch & Data integration, particularly the integration of the sales forces,

18 was behind, rather than ahead of, schedule. Equinix’s stock plummeted $34.75 per share to close at

19 $70.34 per share on October 6, 2010. This one-day decline of over 33% came on volume of over

20 30,500,000 shares, approximately 38 times higher volume than the average Class Period volume.

21 Equinix’s warnings also triggered a sharp sell off in the data center sector on October 6, 2010. The

22 reaction was so negative that, in response, SAVVIS was forced to issue a press release that day

23 reaffirming its own guidance for the year.

24 158. Securities analysts following the Company challenged the Defendants’ credibility in

25 light of the contrast between the disclosures and the Company’s prior assurances. Analysts were not

26 terribly concerned by the “modest” miss of the 3Q10 guidance or revenue reduction. Rather,

27 analysts were shocked by the direct contrast between the Company’s earlier statements regarding the

28


company’s pricing power and limited discounts available to customers, with the revelation that the

2

I Company was unable to maintain firm pricing and was being forced to offer discounts to “a number

3

of” customers, including discounts of over 10%. Moreover, analysts noted the revelation that

4

I Equinix would continue to reduce pricing for magnet customers and would get more aggressive in

5

pricing, which the Company had not highlighted in the past.

6

159. Analysts focused on the contrast between Defendants’ consistent comments that

7

I pricing was stable and the revelation that the Company was issuing discounts to “a number of”

8

customers, including discounts of over 10%, and going back on its historical statement that it would

9

not trade volume for price. Analysts also focused on the contrast between Defendants’ statements

10

that the sales force was integrated and the revelation that, in fact, it was not. For example:

11

160. On October 6, 2010, KBRO issued a report entitled “Lowering Price Target to $81

12

from $88; Preannounces Lower Revenue Guidance,” stating that defendants’ credibility was now in

13

question due in part to “negative pricing” and its inability to “drive better revenue synergies from its

14

recent acquisition”:

15

Lowering Price Target to $81 from $88. As a result of our increasing concern around company churn, potentially negative pricing in colocation and

16

Equinix’s ability to drive better revenue synergies from its recent acquisition we are lowering our 2011 expectations, maintaining our HOLD . . . . We believe

17

management credibility has become increasingly questionable to some investors after several missteps this year, which may keep investors sidelined.

18 . . . While the revenue reduction was modest, we believe it may be indicative

19

of underlying trends in Equinix’s business .

20 . . . Approximately 50% of the revenue reduction is attributable to higher- than-expected churn rates and steeper-than-forecast discounts to renew contracts. In

21

some cases, it appears that strategic customers had pricing adjusted downward as much as 10%. . . . Management continues to indicate that pricing remains firm in its

22

markets, although we believe that competition and supply are beginning to erode pricing stability in some of the colocation markets and may not become fully evident

23

until 2011.

24 *

25

We remain concerned that a more aggressive tactic in the market to [e]nsure higher gross bookings may lead to increasing competition around pricing for colocation.

26 Ex. ZZ.

27

28


161. On October 6, 2010, Oppenheimer issued a report entitled “Downgrading to Perform

2

on Competitive Concerns,” stating that “the magnitude of discounts on large deals surprised us” and

3

that it had concerns about “management credibility and control over the integration process,

4

I considering the positive tone of conversation over the past several months”:

5

After market close, Equinix updated 3Q10 and 2010 guidance – lowered revenue and raised EBITDA. Although the reduction in revenue guidance was not

6

materially large, we found the qualitative commentary regarding pricing/competitive issues more concerning. It appears that EQIX is beginning to see increased pricing

7

pressure for larger customer accounts, particularly from wholesale providers, as incremental capacity becomes available in some markets.

8 *

9 Reduced guidance raises concerns on the competitive front . EQIX

10

announcement clearly highlights a more challenging environment. We had expected the rate of price increases to moderate going forward, but the magnitude of discounts

11

on large deals surprised us. Importantly, we expect competition from wholesale providers to persist as EQIX targets large/less network centric deals.

12 Churn/SDXC run rate are lesser concerns, but raise credibility questions. We

13

expect EQIX to fix the churn calculation issues and address the discrete SDXC revenue run rate adjustments. However, these issues raise larger questions of

14

management credibility and control over the integration process, considering the positive tone of conversation over the past several months.

15 Ex. AAA.

16 162. On October 6, 2010, Cowen issued a report entitled “Quick Take: Reduces Guidance;

17 We are Defending the Comp. Group,” in which it wondered how many customers the Company

18 would offer discounts to:

19 [C]onsidering its reiterated admission that it will continue to reduce pricing for

20

“magnet” customers and that it reduced pricing by just over 10% for two digital media companies during the quarter, we wonder how much of its customer base

21

meets this distinction and therefore will require below market pricing .

22

iiEx. BBB.

23

163. On October 6, 2010, Merriman Capital issued a report entitled “Lowering Estimates

24

1 and Valuation Range to Reflect Heightened Risk; Reiterate Buy.” Ex. CCC. The report said that the

25

discounts were “straightforward,” but that “the company should have known” about them already:

26

“Around []10-20% of the shortfall was related to discounts to strategic customers for longer

27

contracts. This issue[] seems stratightforward, except that the company should have known this

28


1

I already . In fact, from management’s discussion on the pre-announcement conference call, it appears

2 I that the company somewhat miscalculated such credits offered to certain customers.” Id. at 2.

3

164. On October 6, 2010, RBC Capital issued a report entitled “Equinix, Inc. (NASDAQ:

4

1 EQIX) Preannounces Lower Revenues, Higher EBITDA; Trimming Price Target on Higher Risk.”

5

1 Ex. DDD. The report stated that the Company has not highlighted pricing concessions in the past,

6

I “instead focusing on its premium pricing model”:

7

Our view is that . . . sporadic pricing concessions and churn from colo-centric customers have been modest sector-wide phenomena over the past several quarters.

8

However, EQIX management has not highlighted these in the past, instead focusing on its premium pricing model and strategic advantages stemming from its

9

global footprint. Pricing and churn should merit greater investor scrutiny going forward as 25% of the customer base does not participate heavily in cross-connects

10

or peering .

11 Id.

12

165. On October 6, 2010, Morgan Stanley issued a report entitled “Equinix Inc.: Cutting

13

Estimates on 3Q Pre-Announcement,” which led with the header “ Concerns Beginning to Mount .”

14

Ex. EEE. The report continued: “Today’s negative top-line guidance revisions underscore a

15

1 softening pricing environment for larger deals (>250 kW deployments) with competitive pressures

16

I intensifying from both large wholesale providers and smaller regional players.” Id. As a result,

17

Morgan Stanley cut its “revenue assumptions materially for 2010–2012 . . . due to higher churn

18

estimates and pricing pressures.” Id.

19

166. On October 6, 2010, Guggenheim issued a report entitled “EQIX - BUY - Lowering

20

1 Estimates and Price Target Following Reduced 3Q and FY10 Guidance,” which ascribed the

21

lowered guidance to “greater than expected price discounts for two of its major customers in order to

22

secure long-term contract renewals.” Ex. FFF. The report continued, “This lowered guidance is

23

primarily to reflect the company’s stated customer pressure in North America.” Id.

24

167. Media reports also explained that the 33% stock price drop was due to increased

25

1 competition forcing the Company “to cut prices more than expected” and state that it “will cut its

26

prices” in the future.

27

168. On October 5, 2010, the Associated Press published an article titled, “Equinix cuts

28

3Q and 2010 revenue estimates.” Ex. GGG. The article stated that Equinix “needed to cut prices by


1

more than expected to win long-term contracts” and that “the Switch and Data business it bought in

2

April did not bring in as much revenue as it had estimated.” Id.

3

169. On October 6, 2010, the Associated Press published an article entitled “GE, Verizon,

4

Equinix among big market movers.” Ex. HHH. Regarding Equinix, the article stated: “The data

5

center service provider cut its revenue outlook because of lost North American customers, and will

6

cut its prices.” Id.

7

170. On October 6, 2010, Notable Calls published an article entitled “Equinix (NASDAQ:

8

EQIX): Bounce?” Ex. III. The article stated: “The concerns that investors have are credibility and

9

pricing. . . . [I]n a highly recurring revenue business like datacenters, such a miss from a company

10

that is well respected is somewhat disturbing.” Id.

11

171. On October 6, 2010, T3Live published an article entitled “Cloud Computing Bubble

12

Bursts Following Equinix (EQIX) Warning.” Ex. JJJ. The article stated that Equinix “noted

13

challenges moving forward in overcoming high churn and intensifying price pressures within the

14

industry.” Id.

15

172. On October 6, 2010, MarketWatch published an article entitled “Tech stocks tumble

16

as data firms dive.” Ex. KKK. The article stated: “Equinix said a combination of factors, such as

17

lost customers in North America and bigger-than-expected price cuts for renewing customers,

18

contributed to the outlook.” Id.

19

173. On October 6, 2010, Silicon Valley/San Jose Business Journal published an article

20

entitled “Equinix down 33% in data center dive.” Ex. LLL. The article stated: “Equinix closed

21

Wednesday at $70.34, a drop of $34.75 a share, a [d]ay after saying that it had lost more customers

22

in North America than expected and had to discount more often to close renewals.” Id.

23

174. On October 6, 2010, MarketWatch published an article entitled “Equinix warning

24

sparks selloff on cloud stocks.” Ex. MMM. The article quoted an analyst, who explained: “‘We

25

believe pricing trend is one of the most important indicators of demand-supply balance in the

26

colocation business. . . . [T]he pricing trend is an important metric[] to monitor.’” Id. Another

27

analyst stated that the Company “could be facing changes in its customers’ needs that it hasn’t had to

28


1

1 deal with until now.” Id. A third analyst stated: “‘We had expected the rate of price increases to

2

I moderate going forward, but the magnitude of discounts on large deals surprised us.’” Id.

3

175. On October 7, 2010, Investor’s Business Daily published a front-page story entitled

4

1 “Cloud Stocks Hit Some Big Turbulence After One Vendor Lowers Sales Outlook; Equinix Cites

5

1 Churn, Pricing.” Ex. NNN. The article quoted an analyst who stated that, while Equinix

6

I management’s explanation was “short on detail,” it cited “‘pricing pressures in their main business,

7

which gets to the core of their competitive positioning, and that spooked investors.’” Id. Another

8

analyst opined that “‘Equinix’s growth has slowed because more customers have started evaluating

9

alternatives.’” Id.

10

176. On October 7, 2010, Dow Jones News Service published an article entitled “Concerns

11

1 About Tech Slowdown Rise on Companies’ Warnings.” Ex. OOO. The article stated that the

12

Company’s stock price fell, in part, due to “greater-than-expected discounting to close contract

13

renewals.” Id.

14

177. On October 7, 2010, Zacks Investment Research published an article entitled “Equinix

15

1 Revision Hits Hard.” Ex. PPP. The article stated: “The downgrade can primarily be credited to

16

greater-than-expected customer losses in North America and price discounting to secure long-term

17

contract renewals. Moreover, contribution from the Switch and Data business acquired in April

18

2010 remains insignificant.” Id. “[T]he company’s near-term margin,” the article continued, “is

19

under pressure due to continuous geographic expansion [and] increased competition,” among other

20

things. Id.

21

IX. LOSS CAUSATION

22

178. During the Class Period, as detailed herein, Defendants made false and misleading

23

statements and engaged in a scheme to deceive the market and a course of conduct that artificially

24

inflated the price of Equinix common stock and operated as a fraud or deceit on Class Period

25

purchasers of Equinix common stock by misrepresenting the Company’s business and prospects.

26

Specifically, Defendants made a number of false and misleading statements regarding the

27

Company’s pricing power and the successful integration of Switch & Data (particularly, Switch &

28


1

1 Data’s sales force), all at the same time that Defendants boasted of the “exceptional” visibility they

I had into the Company’s financial model and the extremely high rate of recurring revenue.

179. When Defendants’ prior misrepresentations and fraudulent conduct became apparent

to the market, the price of Equinix common stock fell precipitously, as the prior artificial inflation

came out of the price. As a result of their purchases of Equinix common stock during the Class

I Period, Plaintiffs and other members of the class suffered economic loss (which qualifies as damages

under the federal securities laws).

180. Defendants’ false and misleading statements had the intended effect, causing Equinix

1 stock to trade at artificially inflated prices up to $105.09 per share throughout the Class Period.

181. When Defendants disclosed the truth on October 5, 2010, the price of Equinix stock

1 dropped to $70.34 from the Class Period high – a one-day loss of $34.75, 33% of its value from the

close of trading the day before. The 33% decline in Equinix’s stock price, as the bad news revealing

the true state of the Company’s operations was disclosed, was directly related to Defendants’ prior

misrepresentations and fraudulent conduct.

182. The timing and magnitude of Equinix’s stock price decline negates any inference that

I the loss suffered by Plaintiffs and other Class members was caused by changes in market conditions,

macroeconomic or industry factors, or Company-specific facts unrelated to Defendants’ fraudulent

conduct. On the same day that Equinix stock fell 33%, the NASDAQ dropped only 0.7%, and the

Company’s peer index fell 6% largely on news of Equinix’s plunge. 9 As NewsBites put it in the title

of an article published on October 8, 2010, “Weekly: Equinix [Internet Services; USA] plummets

27.1% in the past week, trailing 100% of its global peers.” Ex. QQQ. The damages suffered by

Plaintiffs and other members of the Class were a direct result of Defendants’ fraudulent scheme to

artificially inflate Equinix’s stock price and the subsequent significant decline in value of Equinix

stock when the true state of the Company’s operations was revealed to the market.

9 The peer index comprises companies cited by Equinix in its Proxy Statement, filed on June 10, 2010, as the peer group against which Equinix benchmarks its performance.

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


1

183. The disclosures that the Company had provided discounts to “a number of” customers

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1 since 2Q10, including discounts of over 10%, and that there was still work to do to integrate the

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I sales forces, in contrast to the Company’s earlier statements that the sales forces were “completely

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I integrated,” were substantial factors in causing Plaintiffs’ losses, which resulted when the artificial

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inflation was removed from the Company’s stock price.

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1 X. NO SAFE HARBOR

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184. Equinix’s verbal safe harbor warnings accompanying its oral forward-looking

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statements (“FLS”) issued during the Class Period were ineffective to shield those statements from

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liability.

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185. The defendants are also liable for any false or misleading FLS pleaded because, at the

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1 time each FLS was made, the speaker knew the FLS was false or misleading and the FLS was

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authorized and/or approved by the Individual Defendants, who knew that the FLS was false. None

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of the historic or present tense statements made by defendants were assumptions underlying or

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relating to any plan, projection or statement of future economic performance, as they were not stated

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to be such assumptions underlying or relating to any projection or statement of future economic

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performance when made, nor were any of the projections or forecasts made by defendants expressly

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related to or stated to be dependent on those historic or present tense statements when made.

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186. Specifically, at the time Defendants’ made the July 28, 2010 false and misleading

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statements, the statements were prefaced by a reference to the risk disclosures in the Company’s

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February 22, 2010 Form 10-K and April 28, 2010 Form 10-Q. Those risk disclosures themselves

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constitute false and misleading statements. The risk disclosures warn of the possibility of “pricing

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pressure” and possible “fluctuations in our operating results” due to “the provision of customer

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discounts and credits,” but significant discounts had already been issued by July 28, 2010. See

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¶¶148, 152-153 (refs to admissions); ¶¶121-126 (former employee reports). It was false and

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misleading to warn about possible fluctuations due to future discounts when discounts that had

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already been issued led to those fluctuations.

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1 XI. CLASS ACTION ALLEGATIONS

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187. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules

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of Civil Procedure on behalf of all persons who purchased or otherwise acquired Equinix common

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stock during the Class Period (the “Class”). Excluded from the Class are Defendants and their

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

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

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which Defendants have or had a controlling interest.

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

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impracticable. The disposition of their claims in a class action will provide substantial benefits to

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the parties and the Court. Equinix has nearly 46 million shares of stock outstanding, owned by

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hundreds if not thousands of persons.

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189. There is a well-defined community of interest in the questions of law and fact

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involved in this case. Questions of law and fact common to the members of the Class which

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predominate over questions which may affect individual Class members include:

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(a) whether the 1934 Act was violated by Defendants;

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(b) whether Defendants omitted and/or misrepresented material facts;

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(c) whether Defendants’ statements omitted material facts necessary to make the

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statements made, in light of the circumstances under which they were made, not misleading;

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(d) whether Defendants knew or deliberately disregarded that their statements

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were false and misleading;

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(e) whether the price of Equinix common stock was artificially inflated; and

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(f) the extent of damage sustained by Class members and the appropriate measure

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of damages.

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190. Plaintiffs’ claims are typical of those of the Class because Plaintiffs and the Class

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sustained damages from Defendants’ wrongful conduct.

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191. Lead plaintiff will adequately protect the interests of the Class and has retained

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counsel who are experienced in class action securities litigation. Lead plaintiff has no interests

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which conflict with those of the Class.


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

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adjudication of this controversy.

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A. Count One – For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

4 193. Plaintiffs incorporate ¶¶1-192 by reference.

5 194. During the Class Period, Defendants disseminated or approved the false statements

6 specified above, which they knew, or deliberately disregarded, were misleading in that they

7 contained misrepresentations and failed to disclose material facts necessary in order to make the

8 statements made, in light of the circumstances under which they were made, not misleading.

9 195. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

10 (a) employed devices, schemes and artifices to defraud;

11 (b) made untrue statements of material facts or omitted to state material facts

12 necessary in order to make the statements made, in light of the circumstances under which they were

13 made, not misleading; or

14 (c) engaged in acts, practices and a course of business that operated as a fraud or

15 deceit upon lead plaintiff and others similarly situated in connection with their purchases of Equinix

16 common stock during the Class Period.

17 196. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of

18 the market, they paid artificially inflated prices for Equinix common stock. Neither Plaintiffs nor the

19 Class would have purchased Equinix common stock at the prices they paid, or at all, if they had been

20 aware that the market price had been artificially and falsely inflated by Defendants’ misleading

21 statements.

22 B. Count Two – For Violation of §20(a) of the 1934 Act Against All

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Defendants

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197. Plaintiffs incorporate ¶¶1-196 by reference.

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198. The Individual Defendants acted as controlling persons of Equinix within the

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meaning of §20(a) of the 1934 Act. By virtue of their positions with the Company, and ownership of

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Equinix stock, the Individual Defendants had the power and authority to cause Equinix to engage in

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the wrongful conduct complained of herein. Equinix controlled the Individual Defendants and all of

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its employees. By reason of such conduct, Defendants are liable pursuant to §20(a) of the 1934 Act.

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XII. PRAYER FOR RELIEF

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WHEREFORE, lead plaintiff prays for judgment as follows:

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(a) Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

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(b) Awarding Plaintiffs and the members of the Class damages, including interest;

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(c) Awarding lead plaintiff reasonable costs and attorneys’ fees; and

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(d) Awarding such equitable/injunctive or other relief as the Court may deem just

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and proper.

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XIII. JURY DEMAND

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Plaintiffs demand a trial by jury.

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DATED: May 2, 2012


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SHAWN A. WILLIAMS MATTHEW S. MELAMED

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15 s/ Shawn A. Williams

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SHAWN A. WILLIAMS

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Post Montgomery Center One Montgomery Street, Suite 1800

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San Francisco, CA 94104 Telephone: 415/288-4545

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415/288-4534 (fax)

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Lead Counsel for Plaintiff

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CAVANAGH & O’HARA PATRICK J. O’HARA

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407 East Adams Street Springfield, IL 62701

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Telephone: 217/544-1771 217/544-9894 (fax)

24 Additional Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I hereby certify that on May 2, 2012, I authorized the electronic filing of 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

caused to be 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 further certify that I caused this document to be forwarded to the following Designated

Internet Site at: http://securities.stanford.edu .

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on May 2, 2012.

s/ Shawn A. Williams SHAWN A. WILLIAMS


Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) E-mail: [email protected]

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