2 of 2 4 U Boob
_________________________
wyca.com
V. ALLEGATIONS OF FRAUD
24. During the Class Period, the Defendants engaged in a scheme to defraud the investors of Hitsgalore.com, Inc. by disseminating false, incomplete and misleading information about the Company's management, operations and business conditions.
25. Defendants began their scheme on February 17, 1999, in their form 8-K filing to the Securities Exchange Commission ("SEC") regarding the merger and reorganization of Systems Communications, Inc. into Hitsgalore.com, Inc., when they falsely stated that:
"Except as set forth in Schedule , there is no claim, legal action, suit, arbitration, governmental investigation, or other legal or administrative proceeding, nor any order, decree or judgment in progress, pending or in effect or to Hitsgalore.com's knowledge threatened, against or relating to Hitsgalore.com, its directors, officers or employees, its properties, assets or business or the transaction contemplated by this Agreement and Hitsgalore.com does not know or have any reason to be aware of any basis for the same, including any basis for a claim of sexual harassment or racial or age discrimination."
26. That same day defendants, in a press release, further announced that:
"Hitsgalore.com is emerging as a major player in search engine technology. Hitsgalore.com may joint venture on other technologies as it sees fit to maintain market dominance." (Emphasis added)
27. On March 8, 1999, defendant Bradford continued the fraud by stating:
"'We are anxious to complete the merger, and we are confident that all conditions of the agreement will be met in a timely manner. We had a very good month in February with dramatic growth in revenues, and we are excited about the future prospect of being one of the few public Internet companies that is actually profitable. We believe that combining our successful Internet business model with the public company, Systems Communications, Inc., will be a winning situation for all concerned.'" (Emphasis added)
28. On March 18, 1999, the defendants continued their scheme by falsely stating in a press release that:
"Systems Communications, Inc. (OTC BB:SCMI) and Hitsgalore.com announced that their reverse merger transaction is complete . . . Appropriate filings are being made. Steve Bradford, CEO of Hitsgalore.com stated: 'We are very pleased to have the reverse merger finalized. The Company is being completely changed, with new management, new offices, a new name and a new Internet business model that we believe will continue to be profitable.' Additional information concerning the reverse split and trading symbol change, and the spin-off of International HealthCare Systems, Inc., will be made soon. Hitsgalore.com is profitable Internet company." (Emphasis added)
29. On March 19, 1999, in a press release, defendants further stated that:
"Hitsgalore.com, Inc., formerly known as Systems Communications, Inc. (OTCBB-SCMI), announced unaudited Gross Revenues for February 1999 of $ 152,369 related to the hitsgalore.com website. This is more than double the January 1999 revenues of approximately $ 70,000. The Company anticipates announcing continued growth for this month. Hitsgalore.com has been a profitable Internet company with a Internet search community that means business." (Emphasis added)
30. On March 24, the defendants again omitted highly material facts from the public when they stated:
"Hitsgalore.com, Inc., (OTCBB-HITS) has received word from the NASD that its stock is now trading under the ticker symbol HITS. Hitsgalore.com is a profitable Internet company with a Internet search community that means business. The Company has previously announced Gross Revenues for February 1999 of $152,369. This is more than double the January 1999 revenues of approximately $ 70,000. The website came out of beta testing in late November '98 and generated revenues of less than $ 20,000 from inception to 12/31/98 (all revenue figures are unaudited). The Company anticipates announcing continued growth for this month." (Emphasis Added)
31. On March 30, 1999, in a press release, the defendants further announced that:
"We believe we have dramatically enhanced our ability to implement our total e-commerce solution, which will benefit the consumer using hitsgalore.com as their portal, as well as the hundreds of thousands of businesses that comprise our database." (Emphasis added)
32. On April 8, 1999, the defendants further made misleading statements regarding the company by omitting material facts in a press release:
"Hitsgalore.com, Inc., today announced a contract with DoubleClick Inc. for online advertising . . .
This is just the first wave of Internet ads that will help us establish and expand our recognition as a major search portal and as a serious player in the search industry. . ." said Hitsgalore.com CEO Bradford.
33. On April 16, 1999, the defendants again omitted the material facts in a press release:
"Hitsgalore.com, Inc., (OTC BB:HITT) announced that it has entered into a Letter of Intent with the Life Foundation Trust for a $10 million investment in the company . . .
Steve Bradford, CEO of Hitsgalore.com, stated: 'We are certain that this investment will help Hitsgalore.com gain valuable market share through the advertising campaigns we have planned. We will also be able to continue our development and expansion into other exciting technologies that are now being readied for release, many of which should occur by the end of this quarter.'
Jeanette Wilcher, trustee for the Life Foundation Trust, stated: 'We were attracted to Hitsgalore.com . . . and we are looking to be a long-term holder of Hitsgalore.com stock.'"
34. Less than once week later on April 21, 1999, the defendants in a press release stated:
"Steve Bradford, Hitsgalore.com CEO noted: 'The market has reacted favorably since the investment was announced on April 16, 1999. At the time the investment was negotiated, the trust was acquiring Hitsgalore.com stock at virtually no discount from the market value. That market value has now nearly doubled, and we are confident that the trust is pleased and will favorably consider other significant transactions with Hitsgalore.com.'" (Emphasis added)
35. On May 10, 1999, the defendants' scheme to inflate the stock without disclosing the material FTC case was succeeding admirably when they announced:
"Hitsgalore.com Inc., a business Internet search directory, said the $1 billion-plus Life Foundation Trust is boosting its stake in the company with a $100 million investment.
The trust's acquisition of 4 million restricted shares at $25 apiece, in addition to its previous purchase of 2 million shares for $10 million, will give it an 11 percent stake, company spokesman Frank Pinizzotto said. Hitsgalore.com's shares surged as much as 33 percent on the news, rising 2 13/16 to 18 5/16 in early afternoon trading after earlier touching 20 11/16."
36. The above statements (¶¶ 25-35 herein) were false and misleading because during the Class Period, defendants were well aware of, or recklessly disregarded, the fact that its founder, Dorian Reed, along with two other individuals, had been ordered to pay over $600,000 to 100 customers for "false claims made by Internet Business Broadcasting, a failed online advertising company they worked for." The above statements were further false and misleading because defendants knew, yet failed to disclose, that the Company initiated its merger with a shell company -- Systems Communications, Inc. -- for the sole purpose of avoiding the due diligence investigation of an initial public offering which would have undoubtedly revealed the above material facts regarding its founder.
VI. TRUTH DISCLOSED
37. Stunning the investment community, on May 11, 1999, the truth regarding the FTC case against founder Reed was finally revealed to the public. As reported in Business Wire:
"Hitsgalore.com Inc., an Internet company whose market value soared from $53 million to $1 billion in three months, didn't disclose its founder was accused of cheating customers at a previous job.
Dorian Reed, who founded Hitsgalore.com 10 months ago, and two co-defendants were last month ordered by a federal judge to pay $613,110 to 100 customers for false claims made by Internet Business Broadcasting, a failed online advertising company they worked for. When Hitsgalore.com became a public company in February, a year after the federal fraud investigation began, it told the Securities and Exchange Commission there were no suits or government inquiries involving any of its employees.
Hitsgalore.com shares plummeted 53 percent, or 10 3/4 to 9 3/8, cutting the company's market worth by $534 million. It was the largest percentage loss of any U.S. stock. The 3.6 million shares traded were 10 times the average of the last 30 days."
38. Further stunning the investment community, on May 12, 1999, Dorian Reed announced his resignation as a director of the Company. As reported on Bloomberg:
"Hitsgalorecom Founder Reed Resigns Amid Scandal
Rancho Cucamonga, California, May 12 (Bloomberg) -- Hitsgalore.com Inc. said its founder Dorian Reed has resigned as a director of the Internet company following accusations he cheated customers in a previous job.
Reed established Hitsgalore.com less than a year ago, and watched its market value jump from $53 million to $1 billion within three months after its shares were listed in February. Before the listing, Hitsgalore.com told the Securities and Exchange Commission there were no suits or government inquiries involving any of its officers or employees."
39. Reaction to Reed's resignation had further deleterious effects on the price of Hitsgalore's stock price. As reported on Bloomberg on May 13, 1999:
"Rancho Cucamonga, California, May 13 (Bloomberg) -- Hitsgalore.com Inc. shares fell as much as 28 percent after the Internet company said its founder quit as a director and officer following accusations he cheated customers in a previous job.
The shares fell 3 to 9 in late morning trading of 664,900 shares, more than the daily average of 423,000 over the last 30 days. The shares fell as low as 8 5/8.
Dorian Reed, who's the largest shareholder, resigned his posts as chief technology officer and director, a spokesman said. It came after Hitsgalore stock fell 53 percent on Tuesday on reports the company didn't disclose fraud charges against Reed.
Last month Reed and Audrey Reed were ordered by a federal judge to pay $613,110 to 100 customers for false claims made by Internet Business Broadcasting, a failed online advertising company they worked for. It's unknown if the Reeds are related."
40. In ignorance of the adverse facts concerning Hitsgalore's true business condition, which were concealed by defendants, plaintiff and other members of the Class purchased Hitsgalore common stock at artificially high prices, relying upon the statements made and/or upon the integrity of the market and were damaged thereby.
41. Had plaintiff and the other members of the Class known of the materially adverse information not disclosed by the defendants, they would not have purchased Hitsgalore common stock at the artificially inflated prices that they did.
COUNT I
(Violations of Section 10(b) of the Exchange Act
and Rule 10-5 Promulgated Thereunder)
42. Plaintiff repeats and realleges the allegations above as though fully set forth herein.
43. During the Class Period, the defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and the other class members, as alleged herein; (ii) artificially inflate and maintain the market price of Hitsgalore; and (iii) cause plaintiff and other members of the Class to purchase Hitsgalore securities at inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
44. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's stock in an effort to maintain artificially high market prices for Hitsgalore securities in violation of section 10(b) of the Exchange Act and Rule 10b-5.
45. The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company and persons acting as corporate officers knew or recklessly ignored, but failed to disclose, the matters set forth herein.
46. In ignorance of the artificially high market prices of Hitsgalore' publicly traded securities, and relying directly on defendants or indirectly on the false and misleading statements made by defendants, upon the integrity of the market in which the securities trade, on the integrity of the regulatory process and the truth of representations made to appropriate agencies throughout the Class Period and/or on the absence of material adverse information that was known to defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Hitsgalore securities during the Class Period at artificially high prices and were damaged thereby.
47. Had plaintiff and the other members of the Class and the marketplace known of the true financial condition, business prospects and character of leadership of Hitsgalore which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Hitsgalore securities during the Class Period, or would have not done so at the artificially inflated prices which they paid. Hence, plaintiff and the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5.
COUNT II
(Violation of Section 20(a) of the Exchange Act
Against Defendant Bradford)
48. Plaintiff incorporates by reference the above paragraphs above as if set forth fully herein. This Count is asserted against Defendant Bradford.
49. Defendant Bradford acted as controlling person of Hitsgalore within the meaning of Section 20 of the Exchange Act as alleged herein. By reasons of his executive, managerial positions with Hitsgalore, defendant Bradford had the power and authority to cause the Company to engage in the wrongful conduct complained of herein.
50. By reasons of the aforementioned wrongful conduct, defendant Bradford is liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of their wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with purchasing the Company's securities during the Class period.
WHEREFORE, plaintiff prays for relief and judgment, as follows:
(i) Determining that this action is a proper class action, certifying plaintiff as class representative under Rule 23 of the Federal Rules of Civil Procedure and his counsel as class counsel;
(ii) Awarding compensatory damages in favor of plaintiff and the other class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
(iii) Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
(iv) Such other and further relief as the Court may deem just and proper.
JURY DEMAND
Plaintiffs hereby demand a trial by jury.
DATED: May 17, 1999
Kevin J. Yourman (147159)
James E. Tullman (175008)
WEISS & YOURMAN
By: ________________________
Kevin J. Yourman
10940 Wilshire Blvd., 24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800
Michael D. Braun (167416)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468
Attorneys for Plaintiff
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